4 


n-ppciits   and 
collections 


Southern  Branch 
of  the 

University  of  California 

Los  Angeles 


Form  L  1 


This  book  is  DUE  on  the  last  date  stamped  below 


APR  1  6  192© 
AUG  2     1928 
OCT  B     IPI^ft 


JAN  2  8^^^ 
OCT  S 1  1961 


Form  I.  9-5»i-7,"23 


CREDITS 
AND    COLLECTIONS 


BY 
RICHARD  P.  ETTINGER 

MEMBER  OF   THE    NEW    YORK    BAR  ;    ASSISTANT  PROFESSOR   OF   FINANCE, 
NEW   YORK  UNIVERSITY  SCHOOL   OF  COMMERCE,  ACCOUNTS  AND  FINANCE 

AND 

DAVID  E.  GOLIEB 

CREDIT     MANAGER,    EINSTEIN-WOLFF     CO.  ;     CHAIRMAN,     EDUCATIONAL 

COMMITTEE,    NATIONAL    ASSOCIATION    OF    CREDIT    MEN;    LECTURER    ON 

CREDITS   AND   COLLECTIONS,   NEW   YORK    UNIVERSITY    SCHOOL   OF 

COMMERCE,    ACCOUNTS    AND    FINANCE 


44394 

PRENTICE-HALL,  Inc. 

NEW   YORK    CITY 


Copyright,  1917,  by 
Richard  P.  Ettinger 


All  Rights  Reserved 


First  Edition,  April,  1917 

Second    Edition,    September,   1917 

Third  Edition,  January,  1921 


""    .-  PREFACE 

V  This  book  has  been  prepared  primarily  to  meet  the 
demands  of  classes  in  Credits  and  Collections  con- 
ducted by  Universities  and  other  educational  institu- 
tions in  co-operation  with  local  credit  men's  associa- 
tions. The  need  for  a  book  of  this  kind  has  been 
^,1  brought  to  the  attention  of  the  authors,  not  only  by 
^  their  experiences  in  their  own  classes,  but  also  by  the 
annual  reports  of  the  Educational  Committee  of  the 
National  Association  of  Credit  Men. 

The  authors  have  attempted  to  set  forth  in  proper 
detail  the  correct  principles  and  practise  of  credit  man- 
^  agement,  with  special  attention  to  mercantile  credit. 
'^  They  have  also  discussed  a  number  of  practical  credit 
N  problems,  such  as  the  analysis  of  financial  statements, 
^  discounts,  collections,  adjustments,  bankruptcy  prac- 
tise and  credit  insurance,   with   which  the  scientific 
credit  grantor  must  be  familiar. 

Richard  P.  Ettinger 
David  E.  Goueb 
New  York  University 
April,  1917 


CONTENTS 


CHAPTER  I 

PAGE 

Introduction i 

The  Work  of  the  Credit  Man — Theory  of  Panics — 
What  Is  Credit? — Various  Definitions  of  Credit — 
Nature  of  Credit — Uses  and  Advantages  of  Credit — 
The  Part  That  Credit  Plays  in  Modern  Business — 
What  Determines  the  Amount  of  Credit  Used? 

CHAPTER  II 

Forms    of    Credit 12 

General  Acceptability  and  Limited  Acceptability — 
Book  Accounts — Promissory  Notes — Bonds — Shares 
of  Stock — Checks— Bank  Drafts — Bills  of  Exchange — 
Money  Orders — Letters  of  Credit — The  Use  of  Credit 
Instruments  in  Payment. 

CHAPTER  HI 

Classes  of  Credit  and  Credit  Machinery  ....  34 
Mercantile,  Personal,  Banking,  and  Investment 
Credit — Investment  Credit — Forms  of  Investment 
Credit — Sources  of  Investment  Credit — Banking  Credit 
— Bank  Loans — Forms  of  Bank  Loans — Notes  Secured 
by  Collateral — Loans  through  Note  Brokers — The  Eco- 
nomic Function  of  a  Note  Broker — Federal  Reserve 
Act. 

CHAPTER  IV 

Classes  of  Credit  and  Credit  Machinery  (Continued)  .  5C 
Personal  Credit — Reasons  for  Careless  Retail  Credit 
Granting — The  Proper  Basis  for  Retail  Credit  Grant- 
ing— Mercantile  Credit — Terms  of  Credit — Discounts 
— Commercial  versus  Banking  Discounts — Cash,  C.O.D. 
and  C.B.D.  Terms — Dating — Season  Dating — End  of 
Month  Terms —  R.O.G.  Terms. 


vi  CONTENTS 

CHAPTER  V 

PA6B 

The  Duties  and  Qualifications  of  the  Credit  Man  .  .  fj 
Development  of  the  Credit  Man — Duties  of  the 
Credit  Man — Familiarity  with  the  Accounts — Knowl- 
edge of  the  Business  of  Customers — Care  in  Opening 
New  Accounts — Noting  the  Progress  of  Accounts — 
Making  Collections — Knowledge  of  Local  Conditions- 
Stimulating  Sales— Co-operation  with  Other  Credit 
Men — Personal  Qualifications  of  the  Credit  Man — 
Educational  Qualifications  of  the   Credit  Man. 

CHAPTER  VI 

Elements  Determining  the  Credit  Risk   ....      90 
Is  the   Credit  Good?— The   Policy  of  the  House— 
The  Attitude  of  the  Credit  Man — The  Basis  of  Credit 
— Points  to  be  Investigated. 

CHAPTER  VII 

Sources  of  Credit  Information 96 

general  and  special  agencies 
The  General  and  Special  Agencies — The  First  Mer- 
cantile Agency — Growth  of  the  Agency — Organization 
of  the  Agency — Content  of  Agency  Report — Ratkigs — 
The  Use  of  Ratings — The  Function  of  the  Agmcy — 
Tj'pical  Reports — The^Special  Agencies — Specimei>  Re- 
port of  Special  Agency. 

CHAPTER  VIII 

Sources  of  Information   (Continued) 128 

interchange  of  ledger  experience 
The  Credit  Exchange  Bureau — Two  Systems^-A 
Complete  Report  System — Information  Exchan^hd' t)y 
Merr^'rs — Gearing  the  Information — Other  Informa- 
tiori'''Desirable — Objection  to  Credit  Exchange  Bureaus 
— The  Credit  Clearing  House — Features  of  the  Report 
— A  Typical  Credit  Clearing  House  Report — Direct 
Interchange  of  Ledger  Experience — Forms  Used  for 
Direct  Interchange — The  Credit  Department  Investi- 
gator— Objections  to  Oral  Investigations — The  Equip- 
ment of  the  Investigator — The  Reciprocal  Value  of 
Oral  Investigations. 


CONTENTS  vii 

CHAPTER  IX 

PAGE 

Sources  of  Information   (Continued) 151 

RETAIL   CREDIT   BUREAUS 

The  Retail  Credit  Exchange  Bureaus — Methods  of 
Operating — Indebtedness  Reports — Added  Functions 
of  the  Bureau. 

CHAPTER  X 
Sources  of  Information    (Continued) 157 

SALESMEN,    ATTORNEYS    AND    BANKS 

The  Salesman  as  a  Source  of  Information — Infor- 
mation Obtainable  by  Salesman — Value  of  Salesman's 
Information — Securing  the  Co-operation  of  the  Sales- 
man— Salesmen's  Report  Forms — Attorneys  as  Credit 
Reporters — Information  Obtainable  by  Attorney — 
Quality  of  Attorney's  Reports — Compensation  of  Re- 
porting Attorneys — Attorneys'  Lists — Attorneys'  Re- 
port Forms — Bank  Information. 

CHAPTER  XI 
Sources  ^f  Information  (Continued) 178 

MISCELLANEOUS 

The  Personal  Interview — The  Credit  Man's  Attitude 
— Advantages  of  the  Personal  Interview — Travelling 
Credit  Representatives — Corporation  Manuals — Corpo- 
ration Cards — Trade  and  Financial  Papers. 

CHAPTER  XII 

The  Financial  Statement 186 

Value  of  Financial  Statement — Statements  Obtained 
through  the  Agencies — Reasons  for  Obtaining  State- 
ments Direct — Forms  of  Statements — False  Statement 
Laws — Differences  in  the  Three  Statutes  Enacted  in 
1912 — The  Changed  Condition  Brought  about  by  the 
Statute — The  Federal  Law — Reasons  Why  Merchants 
Should  Furnish  Statements — Reciprocal  Value  of 
Statement — Practice  in  Obtaining  Statements. 


viii  CONTENTS 

CHAPTER  XIII 

PAGE 

Construction  and  Analysis  of  Statement  ....  212 
Interpretation  of  the  Financial  Statement — Sug- 
gested Form  of  Financial  Statement  for  Corporations 
— Description  and  Valuation  of  Assets  and  Liabilities 
— Liabilities — Credit  Capacity  of  the  Business — Work- 
ing Capital — Floating  Debt — Collateral  Information — 
Other  Information— Exemptions — The  Assignment  of 
Accounts  Receivable — Advantages  of  Assigning  Ac- 
counts— Objections  to  Assignment  of  Accounts — Com- 
parative Statements — The  Human  Equation. 

CHAPTER  XIV 

rOLLECTIONS 2Si 

Importance  of  Prompt  Collections — Classes  of  Delin- 
quents— Collection  Systems — The  Monthly  Statement 
— Followr-up  Systems — The  "Tickler"  System — The 
Use  of  Drafts — The  Endorsement — Collection  Corre- 
spondence— Actual  Procedure — Weak  Debtors — Notes 
— Attorneys — Forwarding  Lawyers — Collection  Agen- 
cies— Collection  Agency  Forms — Special  Problems  in 
Collections — Interest  on  Past  Due  Items — Collecting 
Interest — The  Unearned  Discount  Abuse — Defective 
Remittances. 

CHAPTER  XV 

Legal  Remedies  of  the  Creditor 288 

Unpaid  Seller's  Lien — When  Right  May  Be  Exer- 
cised— Lien  After  Part  Delivery — When  Lien  Is  Lost 
— Stoppage  in  transitu — Result  of  Stoppage  in  tran- 
situ— Resale  by  the  Seller — Rescission  by  the  Seller 
— Recovery  of  the  Goods — Waiver  of  Right  to  Recover 
— Attachment — Advantages  of  Attachment — Supple- 
mentary Proceedings — Garnishment — Bulk  Sales  Law 
— The  Use  of  the  Bulk  Sales  Law. 

CHAPTER  XVI 

Extensions,  Compositions  and  Adjustments      .       .        .    307 

The  Condition  of  the  Debtor — Motives  Prompting 
an  Extension — The  Humanitarian  Side — When  to 
Grant  an  Extension — Reasons  for  Embarrassment — 
The  Situation  in  the  South  in  1914 — The  Situation  of 


CONTENTS  ix 

a  Metropolitan  Store — Legal  Aspects  of  Extensions — 
Composition  Settlements — When  to  Agree  to  Compo- 
sition^— Legal  Aspects  of  a  Composition — Adjustment 
Bureaus' — Advantages  of  the  Adjustment  Bureau  ■ — 
Winding  Up  an  Estate' — Activity  in  Bankruptcy  Cases 
— Adjustment  Procedure — Adjustment  Bureau  Results 
— Future  of  the  Adjustment  Bureau. 

CHAPTER  XVII 

PAGE 

Bankruptcy,  Insolvency  and  Receiverships  .  .  .  Z'^l 
Origin  of  Bankruptcy  Legislation — Theory  of  Bank- 
ruptcy Laws — Federal  and  State  Laws — Receiverships 
— Voluntary  and  Involuntary  Bankruptcy — Who  May 
Become  Bankrupts — Five  Acts  of  Bankruptcy — Provi- 
sional Remedies  Pending  Involuntary  Adjudication—' 
Trial — Referees — Schedules- — ^Meetings  of  Creditors — 
The  Trustee — Proof  and  Allowance  of  Claims — Debts 
Which  May  Be  Proved — Filing  Proof  of  Claims — 
Allowable  Claims — Voidable  Preferences — Priority  of 
Payment  of  Debts — Dividends  in  Bankruptcy — Compo- 
sitions in  Bankruptcy — Discharge  of  the  Bankrupt — 
Debts  not  Discharged — The  Credit  Man  and  the  Bank- 
ruptcy Act. 

CHAPTER  XVIII 
Credit  Safeguards 358 

Guarantees — Form  of  Guaranty — Credit  Insurance — 
Definition  of  Credit  Insurance — Ascertaining  the 
Initial  Loss — Determining  the  Insurance  Premium — 
Limitations  of  the  Polic}' — A  Concrete  Illustration — 
Typical  Adjustments — Arguments  in  Favor  of  Credit 
Insurance — The  "Own  Loss"  Theory  Untenable — Shall 
We  Insure?— The  Best  Credit  Insurance — The  Na- 
tional Association  of  Credit  Men — Other  Activities  of 
the  Association — Advantages  of  Membership  to  the 
Individual  Credit  Man — Publications  of  the  Associa- 
tion— Reports  on  Collection  Agencies — Adjustment  Bu- 
reaus—Credit Exchange  Bureaus — Canons  of  Commer- 
cial Ethics  Adopted  by  the  National  Association  of 
Credit  Men. 


CREDITS  AND  COLLECTIONS 


CHAPTER  I 
INTRODUCTION 

In  the  work  of  the  credit  man  can  easily  be  found  the 
germ  of  a  profession.  A  profession  is  an  occupation 
requiring  special  knowledge  supplemented  by  constant 
search  and  research  for  new  knowledge,  wherein  the 
practitioner  regards  the  satisfaction  of  service  to  hu- 
manity as  part  compensation  for  his  efforts.  That  this 
definition  is  appropriate  for  the  so-called  three  profes- 
sions of  law,  medicine  and  the  ministry  needs  no  dem- 
onstration. But  we  become  confused  when  we  call  en- 
gineering or  accounting  or  even  business  a  profession. 
In  fact  many  believe  the  antonym  of  profession  is 
business  and  that  it  is  contradictory  to  call  business  a 
profession.  By  a  lofty  mind  almost  any  occupation 
can  be  exalted  to  the  dignity  of  a  profession,  and  on 
the  other  hand,  even  the  traditional  professions  can  be 
— and  in  isolated  cases  they  have  been — debased  to 
the  plane  of  self-serving  business.  The  test,  after  all,  is 
the  attitude  of  the  practitioner.  Through  ignorance,  if 
not  through  avarice,  some  minds  are  incapable  of  as- 
suming the  professional  attitude.  They  do  not  see  the 
relation  of  their  work  to  public  welfare  and,  there- 


2  CREDITS  AND  COLLECTIONS 

fore,  cannot,  except  by  accident,  bend  their  efforts  to 
promoting  the  general  good  of  humanity. 

The  opportunity  of  the  credit  man  lies  in  the  fact 
that  he  can  help  regulate  the  volume  of  credit  in  the 
country  and  thus  contribute  to  the  orderly  expansion 
of  business.  When  business  moves  more  rapidly  than 
the  increasing  wealth  of  a  nation  warrants,  ruin  fol- 
lows as  inevitably  as  it  does  when  an  individual  busi- 
ness expands  beyond  the  capacity  of  its  working 
capital, 

THEORY   OF   PANICS 

While  many  theories  to  explain  the  causes  of  panics 
have  been  advanced,  undoubtedly  all  can  be  reduced 
to  the  theory  of  undue  expansion  of  credit.  "Pyra- 
miding" is  a  process  that  is  known  to  the  commercial 
as  well  as  to  the  financial  world.  It  consists  of  expand- 
ing investments  in  plants  and  machines  and  other 
forms  of  fixed  assets  in  the  hope  of  catching  rapidly 
growing  business.  Everybody  feels  confident  and  is 
willing  to  give  credit.  Prices  rise  and  the  demand  for 
goods  increases  to  supply  the  desire  to  make  profits  on 
these  high  prices  through  resales.  Book-account  cred- 
its as  well  as  loans  expand  rapidly.  As  prices  go  up 
and  collateral  becomes  more  valuable,  new  loans  are 
negotiated  on  their  security.  Suddenly  the  bottom 
falls  out  of  the  boom  and  the  business  world  rushes  to 
collect  the  accounts  and  notes  payable.  The  banks, 
drawn  upon  for  cash,  call  in  their  loans.  The  snake 
gets  hold  of  its  own  tail  and  begins  to  swallow  glutton- 
ously.    Securities  are  staid  to  provide  cash  for  the  be- 


INTRODUCTION 


devilled  debtor  and,  as  the  selling  depresses  stock-mar- 
ket prices,  the  loans  made  on  the  collateral  of  the  fall- 
ing securities  are  called  and  away  goes  everything. 

Panics  undoubtedly  thrive  on  wild  optimism — the 
optimism  of  the  fellow  who  has  nothing  to  lose  but 
who  makes  his  killing  when  the  era  of  good  feeling 
comes  in.  But  he  is  included  among  the  objects  of 
the  slaughter. 

It  takes  moral  courage  to  stand  pat  under  these 
circumstances.  Orders  rushing  in,  competitors  work- 
ing overtime,  prices  soaring,  these  are  siren  calls  that 
only  the  most  sophisticated  can  withstand.  The  story 
is  told  in  the  accompanying  chart. 


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4.  CREDITS  AND  COLLECTIONS 

The  country  needs  credit  men  who  can  study  and 
understand  these  facts;  men  with  courage  to  forego 
the  seeming  profits  of  speculative  prosperity;  who 
will  contribute  to  the  regulation  of  business  growth 
by  practicing  their  profession  with  all  the  painstaking 
care  that  marks  the  work  of  the  great  surgeon  or  the 
renowned  lawyer. 


WHAT   IS   CREDIT? 

"Credit  is  the  power  to  obtain  goods  or  service  by 
giving  a  promise  to  pay  money  (or  goods)  on  de- 
mand or  at  a  specified  date  in  the  future."  ^  It  should 
be  understood  that  because  goods  are  seldom  used  to 
discharge  the  obligation  of  credit,  we  might  look  upon 
credit  as  money.  Indeed,  the  difference  between  credit 
and  money  is  very  slight  in  practical  business  affairs. 
We  speak  of  money  ordinarily  being  more  generally 
acceptable  than  credit,  but  if  we  consider  that  this 
money  is  turned  into  credit  as  soon  as  it  is  received 
(by  depositing  it  in  a  bank  to  prevent  loss  by  fire  or 
theft),  we  immediately  realize  that  in  every-day  life 
credit  is  in  some  forms  at  least  the  equal  of  money. 
Yet,  this  is  not  always  so.  Let  us,  therefore,  under- 
stand at  the  very  outset  that,  after  all,  credit  is  only 
as  good  and  as  strong  as  the  person  or  institution  upon 
whom  it  places  the  obligation  to  make  the  future  pay- 
ment in  money. 

^  Johnson's  Money  and  Currency,  p.  9. 


INTRODUCTION  5 

VARIOUS   DEFINITIONS   OF   CREDIT 

Before  looking  further  into  the  nature  of  credit,  we 
must  be  sure  there  is  no  difficulty  in  the  reader's  mind 
about  the  definition  of  this  word.  It  has  been  vari- 
ously defined  and  has  been  variously  used.  "The  word 
'credit'  is  employed  in  different  ways  in  every  day  life 
and  in  the  business  world.  No  single  definition  will 
cover  its  full  significance.  A  man  is  said  to  have 
credit,  for  instance,  i.  e.,  he  is  known  to  be  a  man  of 
integrity  who  always  pays  his  debts  when  due.  Here 
credit  means  the  power  to  borrow  or  to  get  goods  or 
services  by  promising  to  pay  in  the  future.  To  the 
bookkeeper  the  word  'credit'  means  the  opposite  of 
'debit,'  namely,  that  something  is  owed  to  a  person  or 
to  an  account.  If  a  general  wins  a  victory,  we  give 
him  credit  for  it,  and  his  friends  object  if  the  credit 
is  given  to  any  one  else.  Preserving  the  idea  of  in- 
debtedness, we  may  say  that  by  this  use  of  the  word 
we  give  him  his  due.  The  etymology  of  the  word 
take^  us  back  to  the  Latin  credo,  'I  believe'  and  the 
Roman  accountants  employed  creditmn  as  our  book- 
keepers do  'credit'  as  signifying  something  due  a  per- 
son. John  Stuart  Mill,  in  his  Political  Economy,  de- 
fined credit  as  being  the  permission  to  use  another's 
capital.  Mr.  H.  D.  MacLeod,  in  his  Theory  of  Credit, 
defines  it  as  *a  right  of  action.'  "  ^ 

NATURE   OF   CREDIT 

Is  credit  wealth?    We  are  certain  that  most  people 
believe  it  is.    Herein  lies  a  great  difficulty,  for  it  is  this 
^  Johnson's  Money  and  Currency,  p.  34. 


6  CREDITS  AND  COLLECTIONS 

conception  of  credit  that  leads  to  undue  expansion  of 
credit,  speculative  business,  panics  and  consequent  mis- 
ery. It  is  easy  to  demonstrate  that  credit  is  not  wealth. 
Three  men.  A,  B  and  C,  can  give  one  another  credit, 
which  if  wealth,  would  fill  the  coffers  of  the  world. 
But  while  with  this  credit  they  could  possibly  get  con- 
trol of  one  another's  property,  soon  this  would  be  ex- 
hausted in  supplying  their  wants,  and  then  their  credit 
would  be  as  useless  as  a  kettle  with  nothing  to  put 
in  it.  "No  more  wealth,  no  more  capital,  no  more 
goods  exist  after  credit  is  given  than  before.  Never- • 
theless  the  use  of  credit  does  lead  to  an  increase  of 
wealth,  for  it  brings  the  productive  agents  of  a  coun- 
try into  the  possession  of  those  men  who  are  most 
competent  to  utilize  them.  Just  as  the  railroad  has 
rendered  the  rich  prairies  of  Nebraska  and  Kansas 
available  to  the  farmer,  so  does  credit  render  available, 
to  the  modern  business  man  remote  hoards  of  capital 
that  would  otherwise  be  idle.  Indirectly,  therefore, 
credit  is  an  agent  of  production."  ^ 

USES   AND   ADVANTAGES   OF  CREDIT 

From  the  foregoing  it  must  be  obvious  to  the  reader 
that  credit  cannot  create  something  out  of  nothing. 
The  mere  extension  of  credit  does  not  result  in  the 
creation  of  capital,  but  simply  transfers  the  means  of 
production  from  one  person  to  another.  True,  this 
usually  results  in  a  transfer  of  capital  from  the  hands 
of  a  lender  or  creditor  unwilling  or  incompetent  to  use 
the  capital  himself,  to  a  borrower  or  debtor  more  com- 

^  Johnson's  Money  and  Currency,  p.  37. 


INTRODUCTION  7 

patent  and  willing  to  put  the  capital  to  work  for  him. 
Thus  one  who  has  capital  which  he  is  unable  to  use 
may  deposit  it  with  a  banker  and  receive  interest  or 
compensation  for  the  transfer  of  the  capital.  The 
banker  in  turn  will  lend  the  money  so  deposited  to 
some  trader  or  artisan,  who  can  use  the  capital  produc- 
tively.    Thus  credit  renders  capital  more  productive. 

Credit  renders  many  other  important  and  valuable 
services  to  the  business  man.  These  have  been  set 
forth  with  great  clearness  by  Professor  Conrad,  and 
quoted  by  Professor  Ely  in  his  article,  "German  Co- 
operative Credit  Unions,"  as  follows : 

"(i)  Credit  furnishes  a  more  perfect  and  con- 
venient means  of  payment  in  large  sums  and  between 
distant  places  than  the  precious  metals,  saving  time 
and  labor.  This  is  effected  by  means  of  notes,  checks, 
and  bills  of  exchange. 

(2)  Credit  takes  the  place  of  corresponding 
amounts  of  gold  and  silver.  This  is  a  saving,  as  it 
enables  us  to  employ  the  precious  metals  for  other 
useful  purposes. 

(3)  Capital  is  employed  more  productively.  He 
who  possesses  capital,  but  is  for  any  reason  unable  to 
make  use  of  it,  transfers  it  to  another  for  a  compensa- 
tion, to  the  benefit  of  both,  as  well  as  that  of  the  pub- 
lic economy.  It  is  given,  caeteris  paribus,  to  him  who 
is  ready  to  pay  the  highest  price  for  its  use;  that  is,  in 
general,  to  him  who  can  employ  it  most  productively. 

(4)  The  laborers,  artisans,  and  traders,  although 
unprovided  with  means  of  their  own,  may  by  the  use 
of  credit  obtain  capital  to  assist  them  in  their  labors, 
and  that  without  sacrificing  their  independence.  This 
point  is  to  be  particularly  borne  in  mind  as  of  especial 


8  CREDITS  AND  COLLECTIONS 

weight  in  judging  the  credit  unions.  Credit  is  thus 
of  importance  in  avoiding  that  separation  of  capital 
and  labor  which  excites  so  much  bad  feeling,  and 
which  forebodes  danger  to  modern  civilization. 

(5)  Credit  gathers  together  the  smallest  sums, 
which,  by  means  of  joint-stock  companies  and  other- 
wise, are  economically  employed.  Capital  is  concen- 
trated, but  its  returns  are  disseminated  among  the  peo- 
ple, politically  a  weighty  point. 

(6)  The  possibility  of  employing  every  sum,  how- 
ever minute,  urges  people  on  to  saving. 

(7)  Credit  binds  together  the  interests  of  those  hav- 
ing dealings  with  one  another.  Under  a  highly  devel- 
oped system  of  credit  economy,  it  is  the  interest  of 
each  to  show  himself  worthy  of  trust;  this  can  be  of 
advantage  in  the  moral  education  of  a  people. 

(8)  It  enables  men  to  save  for  their  old  age,  and 
make  provision  for  their  families  in  case  of  their  death. 
Were  there  no  such  thing  as  credit,  the  best  one  could 
do  would  be  to  heap  up,  and  then  consume  afterwards, 
the  capital  gathered  together. 

(9)  Capital,  when  obtained  under  favorable  cir- 
cumstances, yields  a  larger  return  than  the  interest. 
Were  it  otherwise,  borrowing,  except  in  case  of  special 
need  and  distress,  would  cease.  The  prudent  and 
skillful  laborer  who  can  command  credit  is  thus 
enabled  to  obtain,  besides  his  wages,  a  surplus  from 
the  use  of  the  capital.  Credit,  well  used,  is,  therefore, 
economically  as  productive  as  a  favorable  climate  or 
a  high  education  of  a  people." 

THE   PART   THAT   CREDIT    PLAYS  IN    MODERN    BUSINESS 

In  view  of  the  great  power  of  credit  and  the  im- 
portant benefits  accruing  from  the  use  of  credit,  it  is 


INTRODUCTION  9 

not  startling  to  learn  that  eighty-six  per  cent  of  the 
entire  business  of  this  country  is  done  on  credit.  Dr. 
David  Kinley,  as  a  result  of  an  investigation  con- 
ducted for  the  National  Monetary  Commission  in 
1910,  came  to  the  conclusion  that  the  percentage  of 
checks  and  other  credit  paper  used  in  retail  payments 
was  60,  and  the  percentage  in  the  wholesale  payments, 
95.  By  weighing  the  proportion  of  deposits  in  banks 
for  these  two  classes  of  dealers,  Dr.  Kinley  decided 
that  86  would  represent  a  fair  average  percentage  of 
retail  and  wholesale  business  done  with  checks  and 
other  credit  paper. 

The  various  forms  of  credit  paper  and  instrumen- 
talities through  which  these  credit  transactions  are 
carried  on,  are  considered  in  the  next  chapter. 

WHAT  DETERMINES  THE  AMOUNT  OF  CREDIT  USED? 

To  those  who  have  read  the  foregoing  paragraphs 
carefully  it  must  be  apparent  that  the  extent  to  which 
credit  is  used  depends  upon  two  factors :  ( i )  the 
need  for  a  medium  of  exchange,  and  (2)  the  cer- 
tainty of  being  able  to  realize  on  the  obligation  of  the 
debtor.  A  multitude  of  forces  vary  the  need  for  a 
medium  of  exchange,  but  in  a  general  way  the  second 
factor  may  be  said  to  rest  on  confidence. 

It  is  not  our  purpose  to  analyze  confidence  at  this 
point,  but  in  order  to  understand  what  determines  the 
amount  of  credit  used  it  is  necessary  to  indicate  here 
that  there  is  an  objective  and  a  subjective  confidence 
that  enters  into  the  question  of  credit  giving  and  credit 
use.     A  South  American  firm,  for  instance,  may  be 


lo  CREDITS  AND  COLLECTIONS 

worthy  of  confidence — objectively  the  confidence  or  to 
be  more  accurate,  the  basis  of  confidence  is  present — ■ 
but  there  may  not  be  available  means  for  the  North 
American  business  house  to  get  hold  of  the  facts  upon 
which  it  can  establish  confidence  in  its  own  mind — i.  e., 
there  is  no  subjective  confidence.  Generally  then,  we 
may  say  that  credit  will  be  used  to  a  larger  extent  in 
those  countries  that  have  well  developed  facilities  for 
collecting  and  transmitting  credit  information  than  in 
countries  with  poor  facilities  for  collection  and  trans- 
mission of  such  information. 

The  importance  of  proper  facilities  for  getting 
credit  information  will  be  dwelt  on  in  a  later  chapter, 
but  it  is  well  to  indicate  at  this  point  that  the  more 
certain  the  means  of  gathering  credit  information  the 
more  universal  will  be  the  use  of  credit.  This  is  so  by 
reason  of  the  fact,  that  the  general  publication  of  re- 
liable Information  will  both  stimulate  objective  con- 
fidence by  making  it  necessary  for  the  debtor  to  see 
to  it  that  a  report  on  his  financial  condition  is  favor- 
able, and  at  the  same  time  create  subjective  confidence 
by  furnishing  a  basis  of  facts  on  which  it  can  be 
founded. 

One  other  classification  of  confidence  Is  necessary  In 
order  fully  to  understand  the  factors  that  determine 
the  volume  of  credit  in  use  in  any  country  or  In  use 
between  countries.  Confidence  may  be  divided  Into 
moral  confidence  and  legal  confidence.  The  former  Is 
to  a  large  extent  based  on  the  latter.  Thus  It  may 
never  be  necessary  to  justify  one's  confidence  in  a 
debtor  by  resort  to  a  court  if  the  debtor  knows  that 
this  agency  exists  to  make  him  respect  his  obliga- 


INTRODUCTION  ii 

tions.  In  general,  therefore,  credit  is  more  abundantly 
used  in  countries  where  justice  is  certain,  swift  and 
inexpensive  than  in  those  countries  where  the  law's 
delays  and  expensive  litigation  warn  off  the  foreign 
business  man. 


CHAPTER  II 
FORMS  OF  CREDIT 

Credit  may  be  broadly  divided  into  credit  of  gen- 
eral acceptability  and  credit  of  limited  acceptability. 
The  former,  which  is  universally  acceptable,  is  prop- 
erly called  money  or  currency.  Federal  Reserve  notes, 
greenbacks,  banknotes  and  silver  certificates,  all  of 
which  are  mere  promises  to  pay,  belong  to  this  group. 
Much  has  been  written  on  this  kind  of  credit  and  on 
the  effect  of  an  increase  or  decrease  in  the  supply  or 
demand  for  money  upon  prices,  interest,  and  business 
in  general — matters  of  the  most  vital  significance  to 
the  successful  business  man.  It  is  not  our  purjxDse  to 
treat  of  these  matters  here.  It  is  sufficient  to  note 
that  credit  instruments  of  unlimited  acceptability  serve 
in  the  country  of  issue  as  a  substitute  for  money. 

Credit  of  limited  acceptability  includes  all  other 
kinds  of  credit  and  credit  instruments.  It  is  this  class 
with  which  we  are  mainly  concerned.  These  credit 
obligations  may  be  divided  into  book  accounts,  promis- 
sory notes,  bonds,  certificates  of  stock,  checks,  drafts, 
bills  of  exchange,  acceptances  and  letters  of  credit. 

No  person  can  claim  to  understand  the  principles  of 
credit  unless  he  is  thoroughly  familiar  with  the  mean- 
ing and  uses  of  these  various  forms  of  credit. 

12 


FORMS  OF  CREDIT  13 

BOOK  ACCOUNTS 

Probably  the  earliest  and,  certainly,  the  simplest 
kind  of  credit  is  the  book  credit.  This  kind  of  credit 
comes  into  existence,  for  example,  when  a  consumer 
purchases  an  article  from  a  storekeeper  and  has  the 
goods  "charged."  No  written  memorandum  or  evi- 
dence of  the  transaction  is  given  to  the  retailer  by  the 
consumer. 

The  retailer,  however,  makes  an  entry  in  his  day 
book  or  ledger  charging  or  debiting  the  customer,  and 
that  "book  entry"  is  the  only  written  evidence  of 
the  credit  extended  to  the  customer.  It  is  quite 
obvious  that  this  kind  of  credit  has  many  disadvan- 
tages. In  case  of  dispute  between  the  retailer  and  his 
customer  as  to  the  amount  of  indebtedness,  the  book 
entry  of  the  creditor  as  evidence  of  the  debt  would 
hardly  be  as  satisfactory  as  would  the  promissory  note 
or  other  written  acknowledgment  of  the  debtor. 
Again,  if  the  merchant  had  the  promissory  note  of  his 
customer  and  desired  to  borrow  money  from  his  bank, 
he  might  more  readily  borrow  the  funds  by  discount- 
ing his  customer's  note.  While  it  is  true  that  his  book 
accounts  are  personal  property,  and,  as  such,  are  sale- 
able, nevertheless  it  must  be  remembered  that  lenders 
of  funds  are  averse  to  accepting  them  as  collateral.^ 

On  the  other  hand,  retail  book-credit  has  the  im- 

^  There  are  bankers  who  specialize  in  the  business  of  lend- 
ing money  on  the  pledge  of  open  book  accounts.  How  their 
business  is  conducted,  and  the  advantages  and  disadvantages 
of  pledging  open  accounts  receivable  will  be  the  subject  of 
later  chapters. 


14  CREDITS  AND  COLLECTIONS 

portant  advantages  of  stimulating'  sales,  economizing 
the  time  required  to  make  small  payments,  and  obvi- 
ating the  burden,  sometimes  a  dangerous  one,  of  carry- 
ing large  sums  of  money  with  which  to  make  cash  pay- 
ments. 

Like  the  retailer,  the  manufacturer  sells  to  the 
wholesaler  or  jobber  upon  credit  and  often  receives 
from  him  no  written  promise  to  pay.  The  only  evi- 
dence here  again  is  the  entry  made  upon  the  books  of 
the  creditor,  the  manufacturer.  In  the  same  way  the 
manufacturer  or  jobber  sells  to  the  retailer  on  open 
book  credit.  The  manufacturer  or  wholesaler  is  prob- 
ably in  a  better  position  than  the  retailer  in  that  the 
former  usually  obtains  a  receipt  in  writing  acknowledg- 
ing the  delivery  of  the  goods.  Moreover,  certain  bank- 
ers and  financing  companies  are  more  inclined  to  lend 
money  upon  the  pledge  of  the  accounts  receivable  of 
the  manufacturer.  In  other  words,  the  open  accounts 
receivable  of  a  manufacturer  or  wholesaler  are  looked 
upon  as  a  much  better  and  more  liquid  asset  than  the 
accounts  receivable  of  a  retailer. 

PROMISSORY   NOTES 

Our  second  class  of  credit  instruments  is  promis- 
sory notes.  A  promissory  note  is  a  written  promise 
to  pay  unconditionally  a  definite  sum  of  money  on 
demand  or  at  some  specified  time  in  the  future.  A 
promissory  note  is  given  by  a  purchaser  in  payment 
for  goods,  or  given  by  one  person  in  exchange  for 
money  or  the  credit  of  another  individual  or  bank. 

Promissory  notes,  if  payable  to  a  particular  person's 


FORMS  OF  CREDIT  15 

order  or  to  bearer,  are  negotiable.  Title  to  them  may 
readily  be  transferred  by  endorsement  and  delivery. 
A  purchaser  of  a  promissory  note  takes  it  free  from 
practically  all  the  defences  that  would  have  been  avail- 
able against  it  had  it  been  in  the  hands  of  the  original 
payee.  If  the  note  is  endorsed  by  the  payee,  he  adds 
to  it  his  personal  obligation  to  pay  the  note  in  case 
the  original  promissor  fails  to  pay.  For  this  and  other 
reasons,  negotiable  promissory  notes  make  excellent 
security  upon  which  banks  may  loan  money. 

The  objects  and  advantages  of  requiring  promissory 
notes  from  purchasers  are  numerous.  First,  the  note 
is  the  best  evidence  of  the  debt.  Second,  the  note  defi- 
nitely settles  the  amount  due  from  the  buyer  to  the 
seller.  It  practically  closes  all  avenues  of  dispute  as 
to  quality  or  quantity  of  goods,  date  of  payment  and 
discounts.^  Third,  the  note  is  an  effective  aid  in  com- 
pelling prompt  payment  of  the  account.  As  will  be 
seen  later,  a  debtor  will  frequently  neglect  to  pay  an 
open  book  account  on  the  very  day  the  account  is 
due,  but  a  debtor  who  wishes  to  maintain  his  credit 
standing  will  usually  meet  a  note  when  due.  Fourth, 
a  promissory  note  is  more  readily  transferable  and 
salable  than  a  book  account.  The  holder  of  the  note 
can  endorse  it  over  to  his  bank  and  thus  raise  funds 
on  it. 

Nevertheless,  the  use  of  "book  account"  credit  is 
far  more  extensive  than  the  use  of  promissory  notes. 
In  the  retail  trade,  it  is  very  unusual  for  a  merchant 
to  ask  or  obtain  from  his  customers  a  promissory  note. 
The  customer  pays  his  account  by  check  or  cash  at  the 
1  For  a  discussion  of  discounts  see  page  6y,  post. 


i6  CREDITS  AND  COLLECTIONS 

end  of  each  period.  Even  in  dealings  between  the 
wholesaler  and  retailer,  promissory  notes  are  little 
used  as  compared  with  the  extensive  use  of  "book  ac- 
count" credit.  The  provisions  of  the  recently  enacted 
Federal  Reserv^e  Act  ^  will,  however,  tend  to  encour- 
age the  use  of  promissory  notes  in  business  transac- 
tions. 

BONDS 

A  third  kind  of  credit  instrument  is  the  bond.  A 
bond  has  been  defined  as  "a  written  promise,  under 
seal,  to  pay  a  specified  sum  of  money,  usually  $i,ooo, 
at  a  fixed  time  in  the  future,  usually  more  than  ten 
years  after  the  promise  is  made,  and  is  usually  one  of 
a  series  of  similar  bonds,  all  carrying  interest  at  a 
fixed  rate."  ^ 

Bonds  have  printed  on  their  face,  the  security  which 
is  behind  them.  Mortgage  bonds,  for  instance,  are 
secured  by  a  "so-called  deed  of  trust,  or  mortgage, 
in  which  the  corporation's  property  is  mortgaged  to 
the  trustee  for  the  benefit  of  the  bondholders."  ^  De- 
benture bonds  have  behind  them  no  security  other  than 
the  promise  of  the  issuing  corporation,  and  are  really 
nothing  more  than  long-term  promissory  notes  under 
seal.  Income  bonds,  on  the  other  hand,  have  no  "fixed 
interest,"  as  the  interest  paid  is  entirely  dependent 
upon  the  annual  surplus  of  the  issuing  company.  In 
this  respect  income  bonds  are  very  similar  to  shares 
of  stock.  The  name  of  the  bond  frequently  indicates 
its  character,  but  quite  as  often  the  name  is  misleading 

^  See  page  52,  post. 

^  Gerstenberg :    Syllabus  of  Corporation  Finance,  p.  15. 


FORMS  OF  CREDIT  17 

and  recourse  must  be  had  to  the  contents  of  the  bond 
and  instrument  securing  the  bond  issue. 

Bonds  are  usually  issued  by  corporations  to  raise 
capital  for  the  purchase  of  fixed  assets  or  for  per- 
manent working  capital.  Notes,  on  the  other  hand, 
are  seldom  issued  for  these  purposes,  but  are  usually 
issued  for  temporary  financing,  to  carry  the  business 
over  the  peak  of  the  load  or  merely  for  temporary 
working  capital. 

Bonds  are  readily  transferable  by  endorsement  and 
delivery,  and  in  most  states  are  negotiable.  They  are 
often  used  by  holders  as  collateral  for  procuring  loans. 
A  real  estate  mortgage,  which  is  a  conveyance  of 
property  for  the  purpose  of  securing  a  debt,  although 
similar  in  many  respects  to  a  corporate  mortgage  bond, 
is  not  negotiable,  but  merely  assignable. 

SHARES   OF   STOCK 

The  ownership  of  a  corporation  consists  of  its  cap- 
ital stock,  which  is  divided  into  shares,  each  share 
being  a  unit  of  ownership.  The  shares  are  evidenced 
by  certificates.  Thus,  a  certificate  of  stock  is  the 
mere  evidence  of  part  ownership  in  a  corporation  and 
is  not  a  definite  promise  of  the  corporation  to  pay 
any  fixed  sum  of  money  at  any  certain  time  in  the 
future.  The  only  promise  the  corporation  makes  to 
the  stockholder  is  that,  in  case  dividends  are  declared 
on  the  stock  or  in  case  the  corporation  is  dissolved, 
the  stockholder  will  receive  his  proportionate  share. 
There  is  no  distinct  obligation  ever  to  declare  a  divi- 
dend or  ever  to  dissolve  the  corporation.    The  obliga- 


i5  CREDITS  AND  COIXECTIONS 

tion  of  the  corporation  to  its  stockholders  is  not  a  lia- 
bility, but  rather  an  accountability.  Nevertheless,  we 
include  stock  among  credit  instruments,  because  the 
investor  has  given  up  a  present  valuable  consideration 
in  exchange  for  a  future  accountability,  and  further, 
because  certificates  of  stock,  like  bonds,  are  negotiable 
and  readily  transferable  by  endorsement  and  deliv- 
ery, and  are  frequently  used  as  collateral  for  bank 
loans. 

There  are  numerous  classes  of  stock.  Ordinary 
stock  is  known  as  common,  and  unusual  stock,  posses- 
sing a  preference  as  to  dividends,  or  assets,  or  being 
deprived  of  its  voting  power,  is  known  as  preferred. 
The  essential  characteristic  of  preferred  stock  is  sim- 
ply that  it  differs  in  some  respect,  whether  advantage- 
ously or  not,  from  the  common  stock.  It  is  necessary 
to  read  carefully  the  face  of  the  stock  certificate  or 
the  certificate  of  incorporation  to  discover  in  what 
respect  the  stock  is  given  "preference." 

So-called  corporate  stock  of  a  municipality,  or  gov- 
ernment stock,  is  not  stock  at  all,  but  really  notes  or 
bonds,  which  are  promises  to  pay  a  definite  sum  of 
money  at  some  time  in  the  future.  These  instruments 
should  properly  be  included  among  one  of  the  two 
preceding  groups. 

CHECKS 

So  far,  we  have  confined  our  discussion  to  credit  in- 
struments which  are  promises  to  pay.  The  most  im- 
portant and  most  generally  used  order  to  pay  is  the 
check,  A  check  is  a  written  order  drawn  upon  a  bank 
by  a  depositor,  requesting  the  bank  to  pay  on  sight 


FORMS  OF  CREDIT  19 

a  certain  sum  of  money  to  the  order  of  some  per- 
son or  corporation  named  on  the  face  of  the  check. 
The  check  is  so  convenient  that  it  has  become  the 
principal  means  of  payment  and  the  most  used  medium 
of  exchange.  As  we  have  already  seen  money  is 
used  by  a  large  majority  of  fairly  well-to-do  people 
only  for  payment  of  small  items,  and  checks  are  used 
by  these  people  almost  exclusively  for  the  settlement 
of  larger  amounts.  The  use  of  checks  for  payment 
by  the  consumer  is  rapidly  increasing.  Among  the 
wholesale  trade  the  check  is  used  in  practically  all  set- 
tlements. 

A  check  is  a  negotiable  instrument  and  is  easily 
transferred.  It  may  pass  from  hand  to  hand  to  pay 
many  debts.  Checks  may  be  used  in  the  payment  of 
debts  within  a  locality  or  in  a  distant  city. 

It  will  be  seen  that  while  a  check  is  a  mere  order 
on  the  bank  to  pay,  nevertheless,  if  the  bank  refuses 
to  pay  the  check,  because  the  maker  has  not  sufficient 
funds  in  the  bank  or  for  other  reasons,  the  check  be- 
comes the  direct  promise  of  the  maker,  and  a  holder 
may  have  recourse  to  him.  The  check,  in  case  of  non- 
payment by  the  bank,  also  becomes  the  direct  obliga- 
tion of  the  endorsers. 

When  a  depositor  wishes  to  establish  beyond  a  doubt 
that  he  has  sufficient  funds  on  deposit,  and  further  that 
the  bank  will  honor  or  pay  the  check,  he  will  have  the 
bank  certify  his  check.  The  bank's  cashier  or  teller 
stamps  the  word  "certified"  across  the  face  of  the 
check,  and  initials  the  certification.  As  soon  as  this 
is  done  the  check  becomes  the  bank's  promise  to  pay. 
This,  of  course,  adds  greatly  to  the  security  of  the 


20  CREDITS  AND  COLLECTIONS 

payee  of  the  check.  A  certified  check  is  used  in  pay- 
ment when  the  drawer  is  not  well  enough  known  to 
the  payee,  or  where  cash  is  demanded.  For  example, 
where  goods  are  shipped  C.  O.  D.,  and  the  seller  re- 
quires the  purchaser  to  pay  in  cash,  the  seller  will  al- 
ways accept  a  certified  check,  due  to  the  confidence 
business  men  have  in  banks.  Likewise  in  the  closing 
of  a  contract  for  the  sale  of  property,  where  cash  is 
demanded  as  a  condition  precedent  to  the  delivery  of 
the  deed,  a  certified  check  will  be  accepted  by  the 
vendor. 

Another  kind  of  check,  frequently  used  in  place  of 
the  certified  check,  is  the  cashier's  check,  which,  as  its 
name  indicates,  is  an  order  on  a  bank  signed  by  its 
cashier,  payable  to  a  person  the  depositor  designates 
and  charged  to  the  depositor's  account. 

BANK   DRAFTS 

A  bank  draft  is  very  similar  to  a  check.  It  is  an 
order  of  one  bank  on  another  bank  to  pay  money  to  a 
person  named  on  the  draft.  Banks  keep  deposits  with 
banks  in  other  cities  so  that  they  may  draw  upon  them 
as  occasion  requires.  Bank  drafts  are  frequently  used 
to  make  distant  payments,  for  here  there  is  a  distinct 
advantage  in  that  the  drafts  do  not  have  to  be  re- 
turned to  the  place  of  the  drawer  bank  before  they 
are  finally  paid. 

BILLS   OF   EXCHANGE 

A  bill  of  exchange  is  an  instrument  drawn  by  one 
person  ordering  a  second  person  to  pay  a  definite  sum 


FORMS  OF  CREDIT  21 

ot  money  to  a  third  person  on  sight  or  at  some  definite 
future  time.  The  first  and  third  persons  may  be  and 
frequently  are  the  same;  that  is,  one  may  draw  to  his 
own  order  upon  another.  A  domestic  bill  of  exchange 
is  commonly  known  as  a  commercial  draft.  It  usu- 
ally originates  in  a  sale  of  goods,  the  seller  ordering 
the  purchaser  to  pay  either  himself  or  another  who 
will  collect.  The  payee  of  the  draft,  if  it  is  a  demand 
draft,  will  cause  it  to  be  presented  to  the  drawee,  the 
person  upon  whom  it  is  drawn,  for  payment.  If  the 
seller  wishes  to  give  the  purchaser  thirty  or  sixty  days 
to  pay,  he  will  draw  a  time  draft  payable  at  thirty  or 
sixty  days  after  sight  or  at  some  definite  time  in  the 
future.  The  payee  will  then  immediately  cause  the 
draft  to  be  presented  to  the  drawee,  and  the  drawee 
will  accept  the  draft  by  writing  across  the  face  of  the 
draft  "accepted."  When  the  drawee  "accepts"  the 
draft  it  becomes  his  promissory  note  and  the  drawer 
remains  secondarily  liable  as  endorser.  The  accepted 
draft,  or  as  it  is  frequently  called  the  "acceptance," 
may  then  be  sold  to  or  discounted  at  a  banking  insti- 
tution. Moreover,  it  possesses  all  of  the  other  advan- 
tages of  the  promissory  note. 

Although  drafts  at  present  are  little  used  in  domes- 
tic transactions  in  the  United  States,  they  do  play  an 
important  part  in  the  collection  of  accounts.  How- 
ever, there  are  many  factors  at  work  urging  upon 
merchants  the  advisability  of  using  drafts  in  domes- 
tic transactions,  and  it  is  very  probable  that  as  a  re- 
sult of  the  recently  enacted  Federal  Reserve  Act, 
drafts  or  "acceptances"  will  play  a  more  important 
part  in  the  settlement  of  accounts. 


22  CREDITS  AND  COLLECTIONS 

Bills  of  exchange  or  drafts  are  extensively  utilized 
in  foreign  business  transactions.  It  is  a  customary 
practice  for  the  seller  to  draw  upon  the  buyer,  attach 
to  the  draft  the  bill  of  lading  and  other  instruments 
evidencing  the  shipment,  and  sell  or  discount  the  draft 
at  his  bank.  The  local  bank  will  then  send  the  draft, 
with  the  instruments  attached,  to  its  correspondent 
bank  in  the  country  of  the  purchaser.  The  latter  bank 
immediately  presents  the  draft  for  collection,  if  a 
sight  draft,  or  for  acceptance,  if  a  time  draft,  and 
collects  the  draft  when  due.  The  time  draft,  after 
it  has  been  accepted,  may  be  sold  from  one  person  to 
another  until  due.  Because  of  the  nature  of  the  trans- 
action that  gives  rise  to  a  bill  of  exchange,  it  is  con- 
sidered a  comparatively  safe  instrument  for  invest- 
ment. 

MONEY   ORDERS 

The  postal  money  order  and  express  money  order 
are  very  similar  to  a  bank  draft,  and  are  used  to 
facilitate  the  transfer  of  funds.  Like  the  bank  draft, 
they  possess  the  advantage  of  not  having  to  be  re- 
turned to  the  locality  of  the  person  making  payment 
before  they  are  finally  paid. 

LETTERS    OF    CREDIT 

The  traveler's  letter  of  credit,  which  is  intended 
primarily  for  the  convenience  of  travelers,  is  a  re- 
quest from  a  banker  or  firm  to  some  other  banks  or 
firms  to  advance  money  to  the  person  named  on  the 
face  of  the  instrument.     One  who  purchases  such  a 


FORMS  OF  CREDIT  23 

letter  of  credit  has  the  right  to  draw  from  time  to 
time  upon  the  issuing  bank  or  firm  up  to  the  amount 
stated  in  the  letter. 

These  drafts  are  presented  to,  and  paid  by,  the  for- 
eign correspondents  and  branches  of  the  issuing  bank. 
The  correspondents  are  repaid  by  the  issuing  bank. 

SPECIMEN  OF  traveler's  LETTER  OF  CREDIT  ^ 

GUARANTY  TRUST  COMPANY  OF  NEW 
YORK 

Circular  Letter  of  Credit 

No.  0000  $2500.  U.  S. 

New  York,  March  30th,  ipid. 

Gentlemen : 

We  beg  to  introduce  to  you,  and  to  commend  to 
your  courtesies  Mr.  Tom  Jones,  in  whose  favor  we 
have  opened  a  credit  of  Two  thousand  and  five  hun- 
dred Dollars,  Dollars  U.  S.  Currency,  and  whose 
drafts  to  that  extent  at  sight  upon  the 

GUARANTY  TRUST  COMPANY  OF  NEW 
YORK 

140  Broadway 

we  engage  shall  meet  with  due  honor  if  negotiated 
prior  to  January  ist,  191 7. 

^  The  specimen  letters  of  credit  and  explanation  given  here- 
with have  been  taken  from  How  Business  with  Foreign  Coun- 
tries Is  Financed,  a  booklet  prepared  by  the  Guaranty  Trust 
Company  of  New  York. 


24  CREDITS  AND  COLLECTIONS 

The  amount  of  each  payment  must  be  endorsed  on 
this  letter;  and  your  negotiation  of  the  drafts  will  be 
considered  a  guarantee  that  the  requisite  endorsements 
have  been  made. 

You  will  please  observe  that  all  such  drafts  be 
marked  as  ''Drawn  against  the  Guaranty  Trust  Com- 
pany of  New  York,  Letter  of  Credit  No.  oooo." 

This  letter  must  be  attached  to  the  last  draft  drawn. 
We  remain,  Dear  Sirs, 

Yours  faithfully, 


Signature  of 
Tom  Jones 


Vice-President. 
Secretary. 


To  Messieurs  Our  Correspondents. 


Traveler's  Letter  of  Credit 

(Back) 

Showing  how,  where  and  what  amounts  beneficiary 

has  collected 

SPECIFICATION 

OF  ALL  PAYMENTS  MADE  UNDER  THIS 

LETTER  OF  CREDIT. 

(Please  endorse  all  payments  in  Dollars,  U.  S,  cur- 
rency, in  which  this  credit  is  issued.) 


FORMS  OF  CREDIT  25 


Wh^n%aid                  P^^d  by 

Dollars                 Dollars 
Amounts              Amounts 
in  Words             in  Figures 

April  20     London  &  Brazilian  Bank. 

One  hundred  Dollars  $ioo. . 

Ltd.,  Para,  Brazil. 

May      I     Banco  Ultramarine, 

One  hundred  Dollars    loo  . . 

Rio  de  Janeiro. 

May    2y    Banco  Aleman  Transat- 

Two  hundred  Dollars    200  .  . 

lantico,  Buenos  Aires. 

Amount 

carried  forward 

THE  COMMERCIAL  LETTER  OF  CREDIT 

A  form  of  commercial  letter  of  credit  is  used  to 
finance  importations  of  merchandise  into  the  United 
States.     A  specimen  of  this  letter  follows: 

Credit  No 


GUARANTY  TRUST  COMPANY  OF  NEW 
YORK 

Foreign  Department 

New  York,  March  soth,  igi6. 

Chino-Riissian  Export  Corporation, 

Shanghai. 


26  CREDITS  AND  COLLECTIONS 

Gentlemen : 

We  hereby  authorize  you  to  value  on  Guaranty 
Trust  Company  of  New  York,  New  York,  for  account 
of  American  Import  Company,  New  York,  up  to  an 
aggregate  amount  of  Ten  thousand  Dollars  available 
by  your  drafts  at  Four  months'  sight  against  shipment 
of  razv  silk  to  Nczv  York.  Insurance  &  War  risk 
effected  in  A^ezv  York. 

Bills  of  lading  for  such  shipments  must  be  made 
out  to  the  order  of  the  Guaranty  Trust  Company  of 
New  York,  unless  otherwise  specified  in  this  credit. 

Consular  invoice  and  one  bill  of  lading  must  be  sent 
by  the  bank  or  banker  negotiating  drafts  direct  to 
Guaranty  Trust  Company  of  New  York,  NEW 
YORK. 

The  remaining  documents  must  accompany  the 
drafts  drawn  on  Guaranty  Trust  Company  of  New 
York,  New  York. 

The  amount  of  each  draft,  negotiated,  together  with 
date  of  negotiation,  must  be  endorsed  on  back  hereof. 

We  hereby  agree  with  bona  fide  holders  that  all 
drafts  drawn  by  virtue  of  this  Credit  and  in  accord- 
ance with  the  above  stipulated  terms  shall  meet  with 
due  honor  upon  presentation  at  the  Office  of  Guaranty 
Trust  Company  of  New  York,  New  York,  if  drawn 
and  negotiated  prior  to 

Guarantee  Trust  Company  of  New  York. 


N.  B.  Drafts  drawn  under  this  Credit 
must  state  that  they  are  "drawn 
under  Letter  of  Credit 

No 

Dated " 


FORMS  OF  CREDIT      •  27 

A  copy  of  this  letter  is  forwarded  by  the  importer 
to  the  foreign  shipper.  When  the  foreign  shipper  has 
assembled  his  goods  for  shipment,  he  will  present 
this  letter  of  credit  together  with  shipping  documents 
and  a  draft,  details  of  which  have  to  be  in  accordance 
with  the  terms  specified  in  the  letter  of  credit,  to  his 
local  banker.  His  local  banker  will  readily  negotiate 
the  dollar  face  value  of  the  documentary  draft  at  the 
best  possible  rate  of  exchange,  no  matter  whether  the 
drafts  are  drawn  at  sight  or  at  three,  four  or  six 
months  after  sight.  Of  course,  the  longer  the  tenor 
of  the  bill  of  exchange,  the  larger  the  deduction  for 
interest,  etc.,  the  burden  of  which  falls  on  the  foreign 
shipper. 

The  foreign  banker,  who  negotiates  the  exporter's 
draft,  then  ships  the  draft  and  documents  attached 
to  its  New  York  correspondent,  instructing  him  to 
present  the  documentary  draft  to  the  New  York  bank, 
which  issued  the  letter  of  credit.  The  correspondent 
does  this  and  the  New  York  issuing  bank  accepts  the 
draft,  if  a  time  draft,  or  pays  it,  if  a  sight  draft,  and 
retains  the  shipping  documents  at  the  disposal  of  the 
importer. 

The  documents  are  usually  surrendered  to  the  im- 
porter in  trust,  in  evidence  of  which  the  importer  exe- 
cutes a  trust  receipt  giving  the  banker  a  first  lien  on 
the  imported  goods  until  the  importer  has  paid  the 
banker  in  full  on  or  before  the  maturity  of  the  under- 
lying accepted  bill  of  exchange.  Of  course,  if  the 
importer  has  taken  out  a  sight  credit,  he  will  be  ex- 
pected to  reimburse  the  issuing  banker  on  the  day  of 
presentation  of   approved   documents.      The  rate   of 


28  CREDITS  AND  COLLECTIONS 

commission  which  the  American  banker  charges  his 
cHent  for  this  service,  varies  with  the  length  of  the 
financing  period  and  other  considerations. 

It  will  be  noticed  that  in  the  text  of  these  dollar 
credits,  the  issuing  American  banker  obligates  himself 
to  honor  and  pay  bills  of  exchange  drawn  in  terms  of 
his  credit.  It  follows,  that  neither  the  negotiating 
foreign  banker  nor  the  accepting  American  banker  can 
refuse  to  negotiate  or  accept,  as  the  case  may  be,  if 
the  surface  conditions  of  the  credit  have  been  observed 
by  the  shipper.  Consequently  this  form  of  a  nego- 
tiable instrument  should  be  furnished  to  foreign  ship- 
pers of  established  reputation  only. 

Needless  to  state,  the  New  York  bank  before  issu- 
ing such  a  letter  of  credit  must  be  satisfied  as  to  the 
moral  and  financial  responsibility  of  its  customer,  the 
importer,  because  the  transaction  involves  the  grant- 
ing of  credit  secured  by  merchandise  during  time  of 
shipment.  This  period  may  extend  over  several 
months  and  in  the  interval  considerable  fluctuations 
in  the  value  of  the  merchandise  may  take  place. 

AGREEMENT  TO  BE  SIGNED  BY  THE  CUSTOMER  OF  THE 

BANK 

The  following  agreement  is  signed  by  the  American 
importer  in  order  to  safeguard  the  bank  against  pos- 
sible depreciation  in  the  value  of  the  merchandise, 
and  gives  the  bank  the  right  to  dispose  of  the  mer- 
chandise, if  the  terms  of  the  contract  are  not  main- 
tained. 

\ 

\ 
\ 


To  the 


FORMS  OF  CREDIT  29 

New  York, , 19. .. 


GUARANTY  TRUST  COMPANY  OF  NEW 
YORK 

Gentlemen : 

Having   received    from  you  the  Letter  of   Credit 
on account  of  which  a  true  copy  is  on 

the  other  side         hereby  agree  to  its  terms,  and  in 

consideration  thereof         agree  with  you  to  provide 

in  New  York,  one  day  previous  to  the  Maturity  of 
the  Bills  drawn  in  virtue  thereof,  sufficient  funds  in 
cash,  to  meet  the  payment  of  the  same  with 

per  cent  commission,  and  „,^  undertake  to  insure  at 

we 

my 

our  ^^P^"se,   for  your  benefit,  against  risk  of  Fire 

or  Sea,  all  property  purchased  or  shipped  pursuant  to 
said  Letter  of  Credit,  in  Companies  satisfactory  to 
you. 

T^^  agree  that  the  title  to  all  property  which  shall 

be  purchased  or  shipped  under  the  said  credit,  the  bills 
of  lading  thereof,  the  policies  of  insurance  thereon 
and  the  whole  of  the  proceeds  thereof,  shall  be  and 
remain  in  you  until  the  payment  of  the  bills  referred 
to  and  of  all  sums  that  may  be  due  or  that  may  be- 
come due  on  said  bills  or  otherwise,  and  until  the  pay- 
ment of  any  and  all  other  indebtedness  and  liability 
now  existing  or  now  or  hereafter  created  or  incurred 

by        to  you  on  any  and  all  other  transactions  now 

or  hereafter  had  with  you,  with  authority  to  take  pos- 


30  CREDITS  AND  COLLECTIONS 

session  of  the  same  and  to  dispose  thereof  at  your 
discretion  for  your  reimbursement  as  aforesaid,  at 
pubhc  or  private  sale,  without  demand  or  notice,  and 
to  charge  all  expenses,  including  commission  for  sale 
and  guarantee. 

Should  the  market  value  of  said  merchandise  in 
New  York,  either  before  or  after  its  arrival,  fall  so 
that  the  net  proceeds  thereof  (all  expenses,  freight, 
duties,  etc.,  being  deducted)  would  be  insufficient  to 
cover  your  advances   thereagainst   with   commission 

and  interest,        further  agree  to  give  you  on  demand 

any  further  security  you  may  require,  and  in  default 
thereof  you  shall  be  entitled  to  sell  said  merchandise 
forthwith,  or  to  sell  "to  arrive,"  irrespective  of  the 

maturity  of   the   acceptances   under   this   Credit, 
being  held  responsible  to  you  for  any  deficit,  which 

^^  bind  and  oblige  ^JJ^j-'selves  ^°  P^^  ^^^  ^^  ^^^^  °" 
demand, 

,  In  case        should  hereafter  desire  to  have  this  credit 
we 

confirmed,  altered  or  extended  by  cable   (which  will 

be  at     ^  expense  and  risk),         hereby  agree  to  hold 

our       ^  ^    we  ^     ^ 

you  harmless  and  free  from  responsibility  from  errors 
in  cabling,  whether  on  the  part  of  yourselves  or  your 
Agents,  here  or  elsewhere,  or  on  the  part  of  the  cable 
companies. 

This  obligation  is  to  continue  in  force,  and  to  be 
applicable  to  all  transactions,  notwithstanding  any 
change  in  the  composition  of  the  firm  or  firms,  parties 
to  this  contract  or  in  the  user  of  this  credit,  whether 
such  change  shall  arise  from  the  accession  of  one  or 


FORMS  OF  CREDIT  31 

more  new  partners,  or  from  the  death  or  secession 
of  any  partner  or  partners. 

It  is  understood  and  agreed  that  if  the  documents 
representing  the  property  for  which  the  said  Credit 
has  been  issued  are  surrendered  under  a  trust  receipt, 
collateral  security  satisfactory  to  the  Trust  Company, 
such  as  stocks,  bonds,  warehouse  receipts  or  other 
security,  shall  be  given  to  the  Trust  Company,  to  be 
held  until  the  terms  of  the  credit  have  been  fully  satis- 
fied and  subject  in  every  respect  to  the  conditions  of 
this  agreem.ent. 

It  is  further  understood  and  agreed  in  the  event  of 
any  suspension,  or  failure,  or  assignment  for  the  bene- 
fit of  creditors  on     ■'    part,  or  of  the  nonpayment  at 

maturity  of  any  acceptance  made  by  ,  or  of  the  non- 
fulfillment of  any  obligation  under  said  credit  or  un- 
der any  other  credit  issued  by  the  Guaranty  Trust 

Company  of  New  York  on     7.   account,  or  of  any 

indebtedness  or  liability  on  ^  part  to  you,  all  obliga- 
tions, acceptances,  indebtedness  and  liabilities  whatso- 
ever shall  thereupon,  at  your  option  then  or  thereafter 
exercised,  without  notice,  mature  and  become  due  and 
payable. 

It  is  understood  and  agreed  that  you  shall  not  be 
held  responsible  for  the  correctness  or  validity  of  the 
documents  representing  shipment  or  shipments,  nor 
for  the  description,  quantities,  quality  or  value  of  the 
merchandise  declared  therein. 

(Signature) 


32  CREDITS  AND  COLLECTIONS 

THE  USE  OF   CREDIT  INSTRUMENTS   IN   PAYMENT 

It  is  appropriate  at  this  point  to  consider  how  a 
debtor  may  effect  the  payment  of  a  debt  by  the  use 
of  the  credit  instruments  above  mentioned. 

Suppose  that  X  has  bought  a  bill  of  goods  from  Y. 
X  may  pay  in  one  of  several  ways :  ( i )  He  may  "pay 
cash"  and  this  might  be  in  bank  notes,  United 
States  notes,  gold  certificates,  etc.  (2)  He  may  give 
Y  a  check  on  his  (X's)  bank.  (3)  He  may  draw 
and  deliver  a  bill  of  exchange  on  Z  payable  to  Y  or 
Y's  order.  In  such  a  case  Z  was  presumably  a  debtor 
to  X.  (4)  He  may  give  Y  a  promissory  note.  This 
will  merely  defer  actual  payment.  (5)  He  may 
"accept"  a  bill  of  exchange  which  Y  has  drawn  upon 
him.  (6)  He  may  transfer  to  Y  some  check  or  prom- 
issory note  or  bill  of  exchange  which  some  other  per- 
son (say,  V)  has  drawn  to  X's  order  or  to  bearer. 
(7)  He  may  buy  from  his  banker  a  banker's  draft 
or  cashier's  check  drawn  (on  some  other  banker)  in 
favor  of  Y.  X  may  make  this  purchase  by  check  or 
otherwise. 

If  X  is  in  New  York  and  Y  is  in  London  the  pay- 
ment is  likely  to  take  place  in  one  of  the  following 
ways:  (a)  X  may  buy  from  his  banker  a  (banker's) 
bill  of  exchange  drawn  on  some  London  bank.  He 
will  send  this  to  Y  who  will  collect  from  the  London 
bank;  (b)  if  Z,  in  London,  owes  X,  X  may  draw  a 
bill  of  exchange  on  Z  in  favor  of  Y.  He  will  send 
this  to  Y  who  will  collect  from  Z.  (c)  Some  other 
person,  V,  in  New  York,  may  have  a  debtor,  W,  in 
London.     V  may  draw  on  IV,  payable  to  T  or  to 


FORMS  OF  CREDIT  33 

bearer,  and  then  the  bill  may  be  sold  in  the  open  mar- 
ket. X  may  buy  this  in  the  market,  indorse  it  to  the 
order  oi  Y,  send  it  to  Y  who  will  collect  from  W} 

^  Marshal,  Wright,  Field,  Materials  for  the  Study  of  Ele- 
mentary Economics,  page  500. 


CHAPTER    III 
CLASSES  OF  CREDIT  AND  CREDIT  MACHINERY 

From  the  standpoint  of  the  merchant,  and  it  is  his 
viewpoint  we  have  in  mind  in  the  present  volume, 
credit  may  be  divided  into  mercantile,  personal,  bank- 
ing and  investment  credit.^  The  credit  one  merchant 
extends  to  another  when  goods  are  sold  for  the  pur- 
pose of  resale  is  mercantile  credit.  It  is  with  this 
class  of  credit  that  we  are  mainly  concerned. 

Personal  credit  is  closely  related  to  mercantile 
credit,  for,  as  we  shall  see  later,  upon  the  successful 
granting  of  personal  credit  depends  more  or  less  the 

^  This  division  of  credit  has  been  made  to  facilitate  a  dis- 
cussion of  the  various  classes  of  credit  with  which  the  mer- 
chant must  deal  in  his  business.  We  have  omitted  from  this 
classification  "public  credit,"  because  the  merchant,  in  his 
business,  is  not  directly  and  immediately  concerned  with  it. 
Of  course,  it  is  true  that  changes  in  governmental  policies 
and  other  changes  affecting  public  credit  probably  indirectly 
afifect  the  credit  of  the  merchant.  It  is  likewise  true  that  any 
political  changes  in  tarifif,  currency,  etc.,  would  also  affect 
the  merchant,  but  it  is  hardly  within  the  scope  of  this  work 
to  undertake  even  a  superficial  discussion  of  these  subjects. 
The  writer,  however,  urges  upon  the  credit  man  the  necessity 
of  familiarizing  himself  with  these  broader  questions  that 
do  indirectly  affect  the  mercantile  credit. 

34 


CREDIT  MACHINERY  35 

stability  of  our  entire  credit  system.  Personal  credit 
is  the  credit  the  merchant  extends  to  the  individual 
or  family  when  he  sells  goods  to  them  for  consump- 
tion. 

Banking  credit  is  the  credit  a  merchant  obtains  from 
a  bank  in  the  nature  of  short  term  loans.  The  bank's 
function  is  to  furnish  the  merchant  temporary  work- 
ing capital,  either  in  the  form  of  money  or  the  bank's 
own  credit.  As  we  shall  see  later,  when  the  merchant 
applies  to  his  bank  for  a  loan,  the  practice  is  for  the 
bank  simply  to  credit  the  deposit  account  of  the  mer- 
chant by  the  amount  of  the  loan  and  allow  the  mer- 
chant to  draw  checks  against  his  account.  The  mer- 
chant thus  gives  his  promise  to  pay  at  some  future 
time  in  exchange  for  the  bank's  funds  or  the  bank's 
promise  to  pay  on  demand. 

The  larger  the  business  the  merchant  does,  the 
larger  the  working  capital  he  requires  temporarily  to 
finance  the  increasing  business.  Likewise,  those  busi- 
nesses, which  are  seasonal  in  nature,  will  require  tem- 
porary capital  to  tide  them  over  the  period  between 
the  time  the  goods  are  manufactured  and  the  time  they 
are  paid  for  by  purchasers.  The  natural  source  then 
for  obtaining  funds  for  temporary  or  seasonal  work- 
ing capital  is  at  the  bank.  It  appears,  therefore,  that 
there  is  a  very  close  bond  between  mercantile  and 
banking  credit. 

Investment  credit  provides  capital  required  for  fixed 
assets,  that  is,  for  the  purchase  of  land,  buildings,  ma- 
chinery and  other  equipment.  Money  for  this  pur- 
pose is  not  obtained  from  commercial  banks,  but  is 
supplied  to  the  business  either  out  of  the  funds  of  the 


36  CREDITS  AND  COLLECTIONS 

owners  or  by  outside  investors.  This  capital  is  per- 
manently, or  for  a  comparatively  long  time,  invested 
in  the  business.  Where  one  owns  a  business,  his  in- 
vestment can  hardly  be  construed  as  "credit."  But 
where  one  advances  money  to  a  business,  in  exchange 
for  the  company's  promise  to  repay  at  some  distant 
future  time,  there  is  a  giving  of  credit,  and  the  crea- 
tion of  what  is  termed  investment  credit. 

While  the  student  and  credit  man  should  be  familiar 
with  the  practice  of  banking,  and  the  elements  of 
investments,  we  do  not  purpose  to  go  into  a  detailed 
discussion  of  these  subjects,  but  merely  to  set  forth 
certain  principles  for  further  study  and  to  give  the 
reader  a  sufficient  insight  to  stimulate  his  desire  for 
further  reading'  along  these  lines. 

INVESTMENT    CREDIT 

We  have  already  stated  that  credit  extended  to  a 
business  for  its  fixed  assets  is  investment  credit.  The 
working  capital  which  a  concern  requires  in  its  normal 
state  of  business  activity  should  properly  be  coupled 
with  the  capital  required  for  fixed  assets.  This  cap- 
ital will  be  required  permanently  from  month  to 
month.  It  is  not  the  function  of  a  bank  to  lend  its 
funds  permanently  or  for  use  as  the  normal  working 
capital  of  a  business,  but,  as  will  appear  later,  only  to 
help  a  business  carry  the  peak  of  the  load  in  the  sea- 
sons when  the  business  is  paying  for  its  goods  and 
waiting  for  its  customers  to  pay. 


CREDIT  MACHINERY  37 

FORMS  OF  INVESTMENT   CREDIT 

Investment  credit  is  represented  by  real  estate  mort- 
gages, corporate  bonds,  long  term  notes,  or  other 
promises  of  individuals,  firms  or  corporations,  to  pay 
money  at  some  distant  future  time,  and  by  stock  in 
corporations,  shares  in  joint  stock  companies,  or  other 
evidences  of  a  right  to  a  participation  in  the  profits, 
and,  in  case  of  dissolution,  in  the  assets  of  the  issu- 
ing company.  The  bonds  or  long  term  notes  may  or 
may  not  be  secured  by  a  lien  on  some  particular  prop- 
erty or  the  entire  property  of  the  company. 

SOURCES  OF  INVESTMENT  CREDIT 

The  reader  ought  to  have  some  idea  of  the  numer- 
ous sources  of  investment  credit.  The  individual  who 
has  saved  some  surplus  funds,  does  not  wish  to  assume 
the  risk  of  destruction  or  loss  by  fire  or  theft,  to  which 
hoarded  funds  are  subject.  Moreover,  one  who  saves 
or  has  surplus  funds  wishes  to  derive  the  greatest 
benefits  from  his  savings  or  funds.  If  these  funds 
have  been  laid  aside  for  some  future  protection  or 
reserve,  the  owner  of  them  realizes  the  necessity  of 
resorting  to  their  earning  power  and  not  to  the  prin- 
cipal for  present  or  current  purposes.  Idle  funds  pro- 
duce no  income,  and  so  these  persons,  firms  and  cor- 
porations which  have  accumulated  surplus  funds  all 
wish  to  put  these  surplus  funds  to  work  for  them. 
These  investors  are  constantly  seeking  to  place  their 
funds  where  they  will  return  a  fair  income  and  where 
they  will  not  be  subject  to  great  risk.     At  the  same 


38  CREDITS  AND  COLLECTIONS 

time,  these  investors  ordinarily  desire  to  rid  them- 
selves of  the  burden  of  actively  managing  their 
funds. 

In  addition  to  the  group  of  investors  above  men- 
tioned, there  is  another  class  of  individuals  who  have 
surplus  funds  to  put  to  work,  but  who  are  anxious 
to  make  very  large  profits.  They,  of  course,  must  be, 
and  are  willing  to  take  a  commensurately  greater  risk. 
And  so  we  find  that,  in  any  investment,  the  risk  usually 
varies  directly  with  the  income,  and  for  every  degree 
of  variance,  there  is  a  demand  by  different  persons  or 
firms  which  have  funds.  Many  business  houses  forego 
some  income  on  part  of  their  funds,  by  keeping  a 
certain  amount  of  money  on  deposit  at  commercial 
banks  subject  to  check.  These  houses  are  compen- 
sated to  some  extent  by  the  convenience  of  being 
enabled  to  draw  checks  against  their  accounts.  Of 
course,  due  to  competition,  commercial  banks  are  often 
willing  to  pay  a  small  interest  on  these  funds. 

The  above  constitute  all  the  primary  sources  of 
investment  credit.  All  other  sources,  to  which  a 
business  may  look  for  investment  credit,  are  secondary 
sources.  These  sources  may  be  divided  into  two 
groups,  banking  institutions  and  trustees.  The  former 
would  include  banks  and  banking  houses,  which  raise 
funds  for  some  definite  investment  purpose.  Trustees 
would  include  all  institutions  and  individuals  who  in- 
vest funds  not  for  themselves  but  in  trust  for  others. 
The  simplest  example  of  investment  by  trustees  is 
where  funds  are  left  by  a  deceased  person  to  be  in- 
vested by  the  trustee  of  the  estate  for  the  benefit  of 
the  kin  of  the  deceased.     In  like  manner  the  savings 


CREDIT  MACHINERY  39 

banks,  which  are  not  conducted  for  profit,  Invest  their 
deposits  for  the  benefit  of  their  depositors.  Insurance 
companies,  educational,^  and  charitable  institutions  be- 
long in  this  same  category. 

It  is  very  important  for  the  management  of  a  busi- 
ness to  be  thoroughly  familiar  with  both  the  forms 
and  sources  of  investment  credit,  for  two  distinct  rea- 
sons :  first,  that  the  management  may  know  where 
to  apply  for  investment  credit  when  permanent  addi- 
tions are  required  for  its  business;  and  second,  that 
the  management  may  wisely  invest  surplus  funds 
which  are  not  immediately  required  by  the  business. 

BANKING    CREDIT 

If  we  examine  the  nature  of  a  bank's  work,  the  very 
close  relation  between  banking  credit  and  mercantile 
credit  will  be  quite  apparent.  The  so-called  commer- 
cial bank,  with  which  we  are  concerned,  has  two  im- 
portant primary  functions;  first,  to  receive  deposits, 
and  second,  to  make  loans  and  discount  business  paper. 
When  a  bank  receives  deposits,  it  accepts  the  delicate 
trust  of  caring  for  those  funds  without  subjecting 
the  depositor  to  the  dangers  of  loss.     At  the  same 

^  Educational  and  other  similar  institutions  are  frequently 
primary  sources  of  investment  credit,  in  that  they  may  in- 
vest their  own  funds  as  they  choose.  On  the  other  hand,  in 
giving  funds  for  the  establishment  of  an  endowment  or  a 
similar  purpose,  the  donor  will  frequently  limit  the  invest- 
ment of  the  funds  to  certain  securities  or  a  certain  class  of 
securities  or  otherwise.  To  this  extent  educational  institu- 
tions are  secondary  sources. 


40  CREDITS  AND  COLLECTIONS 

time  the  bank  keeps  those  funds  employed  as  con- 
stantly as  possible  to  earn  enough  to  pay  a  reason- 
able dividend  on  the  capital  invested,  besides  the  ex- 
penses of  running  the  bank's  business.  To  accom- 
plish this  dual  purpose  the  bank  must  set  up  a  very 
high  credit  standard  for  persons  who  apply  for  its 
credit  in  the  way  of  loans  or  discounts.  Moreover,  a 
bank  must  keep  itself  in  readiness  to  pay  on  demand, 
the  checks  or  requests  of  its  depositors  for  their 
funds. ^  However,  experience  has  shown  that  only  a 
small  par^  of  the  deposit  is  likely  to  be  requested  from 
day  to  day.  But,  nevertheless,  to  meet  even  these 
demands,  the  bank  must  keep  on  hand  a  sufficient 
reserve  of  currency;  the  balance  the  bank  can  lend 
to  producers  and  traders. 


BANK    LOANS 

The  profits  of  the  bank  depend  upon  its  ability  to 
keep  its  funds  loaned  out.  The  margin  of  profit  a 
bank  realizes  is  comparatively  small,  and  for  this 
reason  a  bank  must  be  much  more  conservative  in 
credit  granting  than  are  most  mercantile  houses  which 
make  a  larger  margin  of  profit.  The  bank  must 
always  be  able  to  pay  its  obligations  on  the  day  they 
mature.     A  mercantile  house  may  delay  paying  its 

^  The  relation  between  the  bank  and  its  depositor  is  merely 
that  of  debtor  and  creditor.  The  bank,  of  course,  does  not 
keep  the  depositor's  funds  separate  and  distinct  from  the 
funds  of  other  depositors.  Each  depositor  is  merely  a  credi- 
tor on  the  same  footing  as  any  other  creditor,  and  no  deposi- 
tor has  a  lien  on  any  special  part  of  the  bank's  funds. 


CREDIT  MACHINERY  41 

open  book  accounts  for  several  days  after  their  due 
date;  likewise,  mercantile  houses  may  secure  an  ex- 
tension of  notes  payable,  or  may  secure  a  loan  from 
its  bank  to  meet  maturing  obligations.  But  with  the 
bank  it  is  different.  Any  attempt  on  the  part  of  a 
bank  to  secure  an  extension  from  its  creditors  is  a 
virtual  confession  of  poor  management  and  weakness, 
and  is  a  forerunner  of  the  bank's  downfall.  This 
means  that  the  bank  must,  first,  set  up  high  standards 
for  credit  applicants,  and,  second,  loan  money  only 
for  short  terms  and  on  securities  that  are  certain  of 
quick  realization.  The  bank  cannot  tie  up  its  funds 
in  long  term  loans,  for  to  do  so  would  mean  that  it 
might  be  unable  to  secure  funds  in  times  of  necessity 
to  pay  its  own  maturing  obligations.  This  merely 
bears  out  our  previous  statement  that  a  merchant 
should  not  and  cannot  look  to  his  bank  for  long  term 
credit  for  permanent  working  capital  or  fixed  assets, 
but  only  for  short  term  loans.  Moreover,  when  a 
merchant  seeks  a  short  term  loan  from  his  bank,  he 
must  be  able  to  measure  up  to  the  high  credit  stand- 
ards set  up  by  the  bank;  he  must  be  able  to  give  the 
very  best  kind  of  security,  either  an  unimpeachable 
financial  statement  of  his  own  business  or  good  bills 
receivable  of  his  customers. 

FORMS   OF    BANK    LOANS 

The  simplest  form  of  a  bank  loan  is  the  discount- 
ing of  a  note  receivable.  Let  us  assume  that  Jones, 
a  retailer,  buys  a  five  hundred  dollar  bill  of  goods 
from  Smith,  a  wholesaler,  on  ninety  days'  time,  and 


42  CREDITS  AND  COLLECTIONS 

gives  Smith  his  note  payable  ninety  days  from  date. 
Smith  can  then  immediately  present  the  note  at  his 
bank  and  have  it  discounted.  The  bank  does  not  give 
Smith  the  face  amount  of  the  note  less  the  discount  in 
currency,  but  usually  credits  Smith's  account  with  this 
amount.  Smith  is  then  in  a  position  to  purchase  other 
goods,  immediately  pay  for  them,  resell  them  to  an- 
other retailer,  and  continually  repeat  the  process.  The 
retailer  in  turn  will  take  up  his  note  with  the  money 
received  from  the  sale  of  the  goods  during  the  course 
of  the  ninety  days.^ 

This  method  of  settling  accounts  by  the  giving  of 
notes  is  little  used  to-day.  The  more  advantageous 
plan  for  the  retailer  to  follow  is  to  borrow  money 
from  his  bank  on  his  own  note,  by  presenting  a  state- 
ment of  good  financial  condition  to  the  bank.  The 
retailer  will  then  have  funds  with  which  to  pay  the 
wholesaler  cash  and  thus  obtain  a  much  better  dis- 
count or  price  ^  than  under  the  system  of  note-giving. 
In  this  case  the  retailer  will  give  the  bank  his  note  and 
the  bank  will  credit  him  with  the  amount  borrowed. 
Against  this  credit  the  retailer  may  draw  checks  with 
which  to  pay  his  accounts  payable.  It  will  be  noticed 
that  in  both  cases  the  bank  loan  takes  the  form  of  a 
credit  to  the  depositor's  account.  No  cash  is  given; 
the  depositor's  available  funds  are  increased  by  aug- 

^  In  this  instance  the  reader  must  remember  that  Smith 
remains  secondarily  liable  on  the  note,  and  in  case  Jones 
defaults  in  payment  the  bank  will  look  to  Smith. 

-  Firms  who  discount  or  buy  for  spot  cash  frequently  enjoy 
merchandising  advantages,  such  as  opportunities  to  pick  up 
job  lots  at  special  prices. 


CREDIT  MACHINERY  43 

meriting  his  checking  account.  The  discounting  of  the 
depositor's  notes,  or  the  making  of  loans  to  the  de- 
positor is  merely  an  exchange  of  the  bank's  credit  for 
the  business  man's  credit ;  the  more  universally  accept- 
able for  the  less  acceptable.^ 

The  notes  given  to  the  bank  by  the  retailer,  or 
merchant,  signed  by  himself  only,  are  known  as  "single 
name"  paper.  When  such  a  note  falls  due  the  bank 
may  look  to  only  one  person  for  its  payment.  The 
note  described  above,  given  by  one  merchant  to  an- 
other merchant  and  endorsed  by  the  latter  to  the  bank, 
is  known  as  "double  name"  paper.  When  this  note 
matures  the  bank  may  look  to  both  merchants  for 
payment.  While  single  name  paper  is  acceptable  to  a 
bank  which  is  certain  of  the  credit  standing  of  the 
borrower,  the  bank  is  more  secure  in  accepting  double 
name  paper  for  the  above  reason  and  because  the 
bank  is  more  certain  that  double  name  paper  represents 
an  actual  sale  of  goods. 

In  this  country,  however,  most  of  the  strong  whole- 

^  Technically  speaking,  when  one  deposits  money  in  a  bank, 
he  purchases  the  bank's  credit.  That  is  to  say,  he  buys,  with 
funds,  the  privilege  of  drawing  checks  against  the  bank  to 
the  extent  of  those  funds.  When  one  secures  a  loan  from 
a  bank,  he  borrozvs  the  bank's  credit.  He  obtains  the  privi- 
lege of  drawing  checks  up  to  a  certain  amount  in  return  for 
his  promise  to  repay  the  bank  later.  When  one  discounts 
another  merchant's  note  at  a  bank  he  exchanges  the  other 
merchant's  (plus  his  own)  credit  for  the  better  credit  of  the 
bank.  Of  course,  it  might  be  said  of  the  second  case  that 
there  is  an  exchange  of  the  merchant's  own  credit  for  the 
bank's  credit. 


44  CREDITS  AND  COLLECTIONS 

sale  houses  do  not  require  notes  from  their  customers. 
They  simply  make  a  book  entry  of  the  debt.  The 
strong  wholesaler  is  able  to  discount  his  own  note 
payable  directly  at  the  bank,  or  offer  it  for  sale 
through  note  brokers.^ 

Likewise,  for  reasons  given  above,  the  strong  re- 
tailer prefers,  when  possible,  to  discount  his  own  note 
payable  at  the  bank  and  pay  the  wholesale  house  cash. 
In  the  past  it  has  usually  been  only  the  weaker  retailer 
who  has  given  the  wholesaler  a  note.  The  strong 
wholesaler  in  turn  has  not  been  inclined  to  discount 
any  notes  he  has  received  from  retailers.  Thus  it  has 
come  about  in  the  United  States  that  single-name 
paper  has  been  more  widely  used  than  double-name 
paper.  In  the  future,  however,  we  may  expect  to 
see  a  change,  for  as  a  result  of  the  recently  enacted 
Federal  Reserve  Act,  many  banks  are  urging  whole- 
sale houses  to  obtain  notes  and  "acceptances"  from 
their  customers  and  to  discount  these  notes  and  "ac- 
ceptances." If  the  wholesale  houses  follow  this  sug- 
gestion, as  they  undoubtedly  will  in  the  course  of  time, 
it  is  very  probable  that  double  name  paper  will  be 
more  prominent  than  single  name  paper. 

ACCOMMODATION  PAPER 

Another  "double  name"  paper,  which  is  sometimes 
less  acceptable  to  banks  than  either  of  those  mentioned 
above,  is  the  note  bearing  an  accommodation  endorse- 
ment. If  we  examine  the  circumstances  which  might 
give  rise  to  accommodation  paper  the  reason  for  its 

^  See  page  48,  post. 


CREDIT  MACHINERY  45 

undesirability  will  be  apparent.  Suppose  Jones,  a  re- 
tailer, has  been  granted  his  full  limit  of  credit  by  the 
wholesalers  from  whom  he  makes  his  purchases.  He 
finds  need  of  additional  stock  to  meet  the  prospective 
demands  of  a  new  season.  He  must  pay  cash  for 
this  stock.  Where  is  he  to  obtain  the  cash?  Prob- 
ably heretofore  he  has  never  used  his  bank  as  a  source 
for  borrowing.  He  seeks  out  a  friend.  Smith,  a  man 
whose  credit  standing  in  the  community  is  unques- 
tioned, and  asks  Smith  to  endorse  a  note  so  that  Jones 
may  raise  the  necessary  funds.  Smith  reluctantly  and 
after  much  urging  endorses  the  note  and  Jones  secures 
the  necessary  funds  by  discounting  it  at  the  bank, 
where  Smith  is  in  high  standing.  The  mere  fact  that 
Jones  has  been  compelled  to  secure  an  accommodation 
indorsement  indicates  his  weakness.  If  he  should  be 
unable  to  meet  the  note  when  due,  the  bank  would  call 
upon  Smith,  who,  because  he  had  endorsed  the  note 
merely  as  a  matter  of  friendship  for  Jones,  would 
put  every  obstacle  in  the  way  of  collecting  it. 

Then,  too,  there  are  numerous  cases  where  one  com- 
paratively weak  concern.  A,  not  being  able  to  discount 
its  own  single  name  paper,  obtains  the  accommodation 
indorsement  of  another  weak  concern,  B.  In  return 
for  this  accommodation  endorsement,  A  endorses  B's 
paper.  Thus,  the  paper  of  each  concern  is  apparently 
strengthened  by  the  endorsement  of  another  concern. 
But  actually  the  paper  of  each  has  become  weakened 
by  this  exchange  of  endorsements!  Suppose  A  fails, 
B  will  be  called  upon  to  pay  the  paper  it  has  en- 
dorsed for  A.  And  in  all  probability  B,  already  in  a 
weak  condition,  will  not  be  able  to  stand  the  added 


46  CREDITS  AND  COLLECTIONS 

burden  of  this  new  obligation.  B's  failure  is  thus  pre- 
cipitated by  A's  failure,  simply  on  account  of  the 
exchange  of  endorsements  between  A  and  B.  Like- 
wise, the  failure  of  B  would  be  followed  by  A's  down- 
fall. Thus,  in  the  cases  cited,  accommodation  en- 
dorsements have  actually  weakened  the  paper  en- 
dorsed. For  this  reason,  accommodation  paper  is 
sometimes  not  desirable.  In  any  event,  to  determine 
the  value  of  "accommodation"  paper,  it  is  necessary 
to  examine  the  circumstances  giving  rise  to  the  crea- 
tion of  the  paper. 

NOTES  SECURED  BY  COLLATERAL 

Sometimes  a  bank  will  require  a  borrower  to 
pledge  bonds  or  stock  as  collateral  security  for  the 
payment  of  a  note  given  by  the  borrower.  This  is 
merely  an  additional  step  to  protect  the  bank  against 
the  borrower's  possible  inability  to  meet  the  note  when 
due.  Of  course,  the  most  desirable  collateral  for  such 
a  purpose  is  securities  having  a  very  wide  market  and 
ready  sale,  such  as  active  bonds  listed  on  the  promi- 
nent stock  exchanges.  A  form  of  collateral  note  in 
use  is  given  below. 

Franklin  Trust  Company    Collateral  Note — Demand 

^2000^%^  New  York,  March  15,  19/7. 

On  demand,  with  interest  at  4  per  cent,  per  annum,  zve  promise 
to  pay  to  the  order  of  the  Franklin  Trust  Company  at  its  office, 
No.  46  Wall  Street,  in  the  Borough  of  Manhattan,  City  of  New 
York,  Two  thousand  j%%  Dollars,  for  value  received,  having  de- 
posited with  said  Trust  Company  as  collateral  security  for  the 
payment  of  this  note  and  of  all  other  liabilities  of  the  undersigned 
to  said  Trust  Company,  due  or  to  become  due  or  which  may 


CREDIT  MACHINERY  47 

hereafter  be  contracted  or  existing,  whether  incurred  directly  or 
indirectly  by  the  undersigned  to  the  said  Trust  Company,  including 
as  well  promissory  notes,  bills  of  exchange  and  other  evidences 
of  indebtedness  in  writing,  made,  endorsed  or  accepted  by  the 
undersigned  and  purchased  or  owned  by  said  Trust  Company,  the 
following  property,  namely : 

$2,000  Chicago,  Rock  Island  &  Pacific  Ry.  Co.  1st  &  ref'g 
4's  I93-J- 

$2,000  Denver  &  Rio  Grande  R.  R.  Co.  ist  cons.  mtgc.  4's  1936. 

The  undersigned  hereby  agree  to  deposit  with  said  Trust  Com- 
pany such  additional  satisfactory  collateral  security  as  the  said 
Trust  Company  may  from  time  to  time  demand,  and  also  hereby 
give  to  the  said  Trust  Company  a  lien  for  the  amount  of  this 
note  and  of  all  the  liabilities  aforesaid  upon  all  the  property  and 
securities  at  any  time  coming  to  or  left  in  the  possession  of  the 
said  Trust  Company  by  the  undersigned,  and  also  upon  any  bal- 
ance of  the  deposit  account  of  the  undersigned  with  the  said 
Trust  Company. 

On  the  non-performance  of  the  foregoing  agreement  as  to 
furnishing  additional  collateral,  or  upon  the  non-payment  of 
this  note  or  of  any  of  the  above  mentioned  liabilities,  then  and 
in  either  such  case  the  said  Trust  Company  is  hereby  authorized 
to  sell,  assign  and  deliver  the  whole  or  any  part  of  said  securi- 
ties or  any  substitutes  therefor  or  any  additions  thereto,  or  any 
other  property  coming  into  or  left  in  possession  of  the  said  Trust 
Company  by  the  undersigned  for  safe-keeping  or  otherwise,  at 
any  Brokers'  Board  in  the  City  of  New  York,  or  at  public  or 
private  sale  at  the  option  of  the  said  Trust  Company  or  of  either 
of  its  officers  without  either  advertisement  or  notice,  which  are 
hereby  expressly  waived.  If  such  securities  or  property  are  sold 
at  public  sale,  said  Trust  Company  may  itself  purchase  the  whole 
or  any  part  thereof  free  from  all  right  of  redemption  or  other 
right  or  claim  on  the  part  of  the  undersigned  which  are  hereby 
waived  and  released.  In  case  of  any  such  sale  the  said  Trust 
Company,  after  deducting  all  costs  and  expenses  of  every  kind 
for  collection,  sale  and  delivery,  may  apply  the  residue  of  the 
proceeds  of  the  sale  or  sales  so  made  to  pay  one  or  more  or 
all  of  the  said  liabilities  to  the  said  Trust  Company,  as  the  said 
Trust  Company  or  either  of  its  officers  shall  deem  proper, 
whether  then  due  or  not  due,  making  proper  rebate  for  interest 
on  liabilities  not  then  due,  returning  the  overplus,  if  any,  to  the 
undersigned,  who  agree  to  be  and  remain  liable  to  the  said  Trust 
Company  for  any  deficiency  arising  on  such  sale  or  sales.  The 
undersigned   do  further  authorize  the   said  Trust   Company 

at  its  option  at  any  time  to  appropriate  and  apply  to  the  pay- 
ment of  this  note,  or  of  any  of  the  said  liabilities,  whether  now 


48 


CREDITS  AND  COLLECTIONS 


existing  or  hereafter  contracted,  any  or  all  moneys  now  or  here- 
after in  the  hands  of  the  said  Trust  Company  on  deposit  or 
otherwise  to  the  credit  of  or  belonging  to  the  undersigned, 
whether  this  note  or  the  said  liabilities  are  then  due  or  not  due. 
The  undersigned,  as  well  also  the  guarantors  and  endorsers  of 
this  note,  if  any,  agree  that  in  the  event  of  the  insolvency  of 
or  the  appointment  of  an  assignee  for  the  benefit  of  creditors 
of,  or  of  a  receiver  for  the  undersigned,  or  the  appointment  of 
such  an  assignee  or  receiver  of  or  for  any  one  or  more  of  the 
makers  of  this  note,  if  there  are  more  than  one,  or  of  or  for 
any  one  or  more  of  the  members  of  any  firm  who  may  make 
this  note,  or  of  or  for  any  guarantor  or  endorser  on  this  note, 
or  in  the  event  that  a  petition  in  bankruptcy  shall  be  filed  either 
by  or  against  either  of  the  persons  above-mentioned,  this  note 
and  all  of  the  aforesaid  liabilities  shall,  at  the  option  of  the  said 
Trust  Company  or  any  of  its  officers,  become  immediately  due 
without  demand  for  payment  thereof  and  without  notice  to  the 
undersigned  or  any  guarantor  or  endorser,  which  demand  and 
notice  are  hereby  expressly  waived.  Collateral  to  this  note  may 
be  changed  and  increased,  or  reduced  or  surrendered  at  the 
option  of  said  Trust  Company  or  any  of  its  officers  without  notice 
to  any  guarantor  or  endorser  either  on  this  note  or  any  other 
liability  of  the  maker  hereof. 

It  is  further  agreed  that  the  said  Trust  Company  may  transfer 
this  note  to  any  other  person,  firm  or  corporation,  and  that  it 
may  deliver  the  said  collateral  or  any  part  thereof  to  the  trans- 
feree of  said  note,  who  shall  thereupon  become  vested  with  all 
the  powers  and  rights  above  given  to  the  said  Trust  Company 
in  respect  thereto,  and  the  said  Trust  Company  shall  thereafter 
be  forever  relieved  and  discharged  from  any  responsibility  or 
liability  in  the  matter. 

William  Walker  &  Co. 


LOANS  THROUGH  NOTE  BROKERS 

The  securing  of  loans  through  note  brokers  is  a 
rather  recent  development  resulting  from  changed  con- 
ditions in  credit  granting.  Before  the  Civil  War,  a 
merchant  came  to  the  city  and  bought  goods.  The 
seller  shipped  the  goods  and  at  the  same  time  received 
a  note  from  the  buyer  or  drew  a  time  bill  on  the 
buyer,  which  the  buyer  accepted.     The  seller  put  the 


CREDIT  MACHINERY  49 

note  or  accepted  bill  in  his  safe  or  raised  funds  by 
discounting  it  at  the  bank. 

The  later  system  of  giving"  cash  discounts  made  it 
desirable  for  the  buyer  to  take  advantage  of  the  dis- 
count by  paying  cash,  i.e.,  by  paying  within  ten  days. 
If  the  buyer  paid  by  note  this  advantage  could  not 
be  had.  Furthermore,  by  giving  a  note  the  buyer 
would  not  have  the  same  opportunity  as  under  the 
open  account  to  examine  the  goods  and  return  what- 
ever was  unsatisfactory. 

With  this  change,  merchants  began  discounting  their 
own  notes  at  the  bank.  This  custom  increased  to  a 
very  great  degree  and  sometimes  one  or  two  banks  in 
the  locality  of  the  merchant  would  find  it  impossible 
or  undesirable  to  advance  all  of  the  funds  required  by 
the  merchant.  The  problem  of  financing  the  notes  of 
these  merchants  was  met  by  so-called  "note  brokers." 
About  1870,  houses  grew  up  which  devoted  themselves 
to  the  sale  of  merchants'  promissory  notes.  Such 
houses  are  found  in  most  large  cities,  including  New 
York,  Chicago,  St.  Louis,  Kansas  City,  Omaha,  Min- 
neapolis, St.  Paul  and  Boston.  They  take  notes  from 
the  maker,  and  find  a  bank  or  banks,  and  in  some  in- 
stances private  individuals,  to  whom  they  sell  the 
paper  at  the  market  rate,  which  fluctuates  from  day 
to  day.  The  broker  may  either  buy  the  paper  outright 
and  then  sell  it,  or  he  may  first  offer  the  paper  for  sale 
in  accordance  with  the  agreement  previously  entered 
into  with  the  borrower.  Where  the  name  of  the  bor- 
rower is  not  very  well  known  a  bank  may  buy  the 
paper  on  a  ten-day  option,  which  period  will  give  suf- 
ficient time  for  an  investigation  of  the  credit  of  the 


50  CREDITS  AND  COLLECTIONS 

borrowers.  The  broker  does  not  ordinarily  endorse 
the  notes,  although  he  usually  guarantees  the  signature 
of  the  borrower. 

The  broker  frequently  is  a  specialist  in  a  certain 
class  of  paper,  and  a  merchant  usually  confines  him- 
self to  one  broker.  When,  however,  a  merchant  puts 
his  paper  in  the  hands  of  several  brokers,  it  is  usually 
a  sign  of  weakness,  and  his  paper  will  probably  be 
thrown  out  by  banks.  At  any  rate,  such  a  method 
would  be  looked  upon  with  suspicion. 

Notes  are  made  as  a  rule  in  denominations  of  from 
$2,500  to  $200,000  each,  the  $2,500  notes  being  sold 
to  country  banks,  and  the  larger  ones  in  larger  towns 
and  cities.  The  unit  common  in  the  dry  goods, 
grocery  and  jobbing  trade  is  the  $10,000  note.  The 
New  England  commission  houses  place  notes  in  de- 
nominations ranging  from  $2,500  to  $15,000. 

THE  ECONOMIC  FUNCTION  OF  A  NOTE  BROKER 

The  reader  may  question  the  economic  justification 
for  the  existence  of  the  note  broker.  In  anticipation 
of  such  a  question  we  may  say  that  both  the  merchant 
and  the  banker  derive  many  advantages  from  the  note 
broker's  work.  The  merchant,  even  though  his  local 
bank  has  loaned  to  its  full  capacity,  is  able  to  raise 
sufficient  cash  through  his  notebroker,  provided,  of 
course,  that  the  merchant  is  in  good  credit  standing. 
Thus,  the  note  broker  saves  the  merchant  time,  worry, 
and  sometimes  embarrassment  in  obtaining  loans. 
Moreover  the  merchant,  by  borrowing  through  the 
note  broker  from  banks  in  different  parts  of  the  coun- 


CREDIT  MACHINERY  51 

try,  is  frequently  able  to  obtain  cheaper  rates  of  inter- 
est than  could  be  obtained  at  the  home  banks.  Then, 
there  is  some  advantage  to  the  merchant  in  having 
his  paper  in  many  hands.  The  chief  among  these  is 
that  he  becomes  known  as  a  good  credit  risk  and  will 
have  a  wide  range  of  people  with  money  to  lend  at 
any  time  he  enters  into  a  large  transaction. 

The  advantages  to  the  bank  may  be  summarized  as 
follows :  first,  a  bank  may  not  be  able  to  loan  suf- 
ficient funds  in  its  own  community ;  the  market  is  too 
narrow.  Through  the  note  broker,  however,  the  mar- 
ket is  extended  to  absorb  all  the  bank's  available  funds. 
Second,  the  bank  is  frequently  enabled  to  obtain  better 
interest  rates  in  other  parts  of  the  country  than  home 
conditions  warrant.  Third,  the  bank  likes  a  certain 
amount  of  this  kind  of  paper,  because  there  is  no 
obligation  to  renew  it  at  maturity.  A  bank  which 
loans  to  the  merchant  direct  is  practically  obliged  to 
support  him  by  renewing  his  note  if  necessary.  On 
the  other  hand,  the  transaction  between  the  broker 
and  the  bank  is  a  purely  personal  one,  and  if  the  bank 
refuses  to  buy  the  notes  or  renew  them  the  merchant 
knows  nothing  about  it,  nor  does  he  care  just  so  the 
notes  are  sold. 

The  note  broker,  on  his  part,  wants  all  the  paper  put 
out  through  him  to  be  good,  for  if  one  of  his  clients 
defaults  the  broker's  business  may  be  seriously  in- 
jured. Moreover,  the  broker  is  well  equipped,  be- 
cause of  his  specialized  interests,  to  pass  judgment 
upon  the  quality  of  paper  he  handles,  and  he  will  see 
to  it  that  the  merchant  does  not  over-extend.  For 
these  reasons  the  banker  feels  secure  in  accepting  paper 


52  CREDITS  AND  COLLECTIONS 

recommended  by  the  reputable  note  broker.  Indeed  it 
is  seldom  that  such  paper  is  not  honored.  Speaking 
from  the  viewpoint  of  the  bank,  one  writer  says,  "It 
is  just  so  much  money  that  can  be  counted  on,  except 
in  the  most  trying"  times,  and  even  during  the  panic 
of  1907,  paper  of  this  kind  was  paid  promptly,  while 
other  notes  were  renewed."  Every  large  merchant 
should  strive  to  establish  such  a  credit,  for  it  may  stand 
him  in  good  stead  in  times  when  he  requires  funds  im- 
mediately. 

FEDERAL  RESERVE  ACT 

It  is  appropriate  to  point  out  briefly  the  features 
of  the  Federal  Reserve  Act  that  will  affect  the  ability 
of  the  merchant  to  borrow  funds  or  extend  his  credit. 
Under  this  Act,  member  banks,  that  is.  National  or 
State  banks  which  are  members  of  the  Federal  Reserve 
System,  may  rediscount  notes,  drafts,  and  bills  of 
exchange  at  a  Federal  Reserve  Bank  by  endorsing 
them.  The  Federal  Reserve  Board  ^  is  empowered  to 
issue  Federal  Reserve  Bank  Notes  to  Federal  Reserve 
Banks  upon  receiving  a  deposit  of  commercial  paper 
from  such  banks.  These  Federal  Reserve  Notes  are 
legal  tender,  and  are  redeemable  in  gold  or  lawful 
money  at  any  Federal  Reserve  Bank,  or  at  the  United 
States  Treasury.    To  the  business  man  in  good  stand- 

^  The  Federal  Reserve  Board  consists  of  seven  members, 
including  the  Secretary  of  the  Treasury  and  the  Comptroller 
of  the  Currency  and  five  members  appointed  by  the  Presi- 
dent. The  Board  exercises  general  supervision  over  reserve 
banks  and  has  the  right  to  regulate  the  activities  of  member 
banks. 


CREDIT  MACHINERY  53 

ing  this  scheme  means  that,  even  in  panicky  times,  he 
can  obtain  necessary  funds  from  a  member  bank,  for 
the  member  bank  in  turn  may  rediscount  his  paper 
at  a  Federal  Reserve  Bank  and  obtain  from  it  the 
necessary  currency.^ 

^  The  provision  of  the  Federal  Reserve  Act  relating  to  this 
is  section  13,  which  reads:  "Upon  the  indorsement  of  any 
of  its  member  banks,  which  shall  be  deemed  a  waiver  of 
demand,  notice  and  protest  by  such  bank  as  to  its  own  in- 
dorsement exclusively,  any  Federal  Reserve  Bank  may  dis- 
count notes,  drafts,  and  bills  of  exchange  arising  out  of  actual 
commercial  transactions ;  that  is,  notes,  drafts,  and  bills  of 
exchange  issued  or  drawn  for  agricultural,  industrial  or  com- 
mercial purposes,  or  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  for  such  purposes — the  Federal  Reserve 
Board  to  have  the  right  to  determine  or  define  the  character 
of  the  paper  thus  eligible  for  discount,  within  the  meaning 
of  this  Act.  Nothing  in  this  Act  contained  shall  be  con- 
strued to  prohibit  such  notes,  drafts  and  bills  of  exchange, 
secured  by  staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise  from  being  eligible  for  such  discount;  but 
such  definition  shall  not  include  notes,  drafts,  or  bills  cover- 
ing merely  investments  or  issued  or  drawn  for  the  purpose 
of  carrying  or  trading  in  stocks,  bonds  or  other  investment 
securities,  except  bonds  and  notes  of  the  Government  of  the 
United  States.  Notes,  drafts  and  bills  admitted  to  discount 
under  the  terms  of  this  paragraph  must  have  a  maturity  at 
the  time  of  discount  of  not  more  than  ninety  days,  exclusive 
of  days  of  grace ;  provided,  That  notes,  drafts  and  bills  drawn 
or  issued  for  agricultural  purposes  or  based  on  live  stock  and 
having  a  maturity  not  exceeding  six  months,  exclusive  of 
days  of  grace,  may  be  discounted  in  an  amount  to  be  limited 
to  a  percentage  of  the  assets  of  the  Federal  Reserve  Bank 
to  be  ascertained  and  fixed  by  the  Federal  Reserve  Board. 


54  CREDITS  AND  COLLECTIONS 

There  is  another  provision  in  the  Federal  Reserve 
Act  that  should  prove  of  great  value  both  to  banks 
and  to  business  houses  engaged  in  foreign  trade.  That 
is  the  provision  permitting  member  banks  to  accept 
and  rediscount  bills  or  drafts  based  on  the  exportation 
or  importation  of  goods,  and  maturing  in  not  more 
than  three  months.  Such  an  acceptance  may  arise,  for 
example,  where  A  in  New  York  buys  a  bill  of  goods 
from  B  in  London,  on  sixty  days'  time.  A's  credit 
standing  is  not  well  known  to  B  in  London,  but  is 
well  known  to  A's  bank  in  New  York.  A,  therefore, 
arranges  with  his  bank  to  "accept"  for  him  a  draft 
which  B  will  draw  against  it.  A  in  this  case  either 
has  sufificient  funds  at  his  bank  to  pay  the  draft  at 
maturity  or  promises  to  provide  them  at  the  necessary 
time.  B  draws  against  A's  bank  and  discounts  the 
draft  at  his  own  London  bank.  B's  bank  sends  the 
draft  to  their  New  York  correspondent,  C  bank,  which 
in  turn  presents  the  draft  to  A's  bank  for  acceptance. 
After  A's  bank  has  "accepted"  the  draft,  it  becomes 
the  promissory  note  of  A's  bank  and  is  readily  saleable 
to  any  bank.  This  plan  will  greatly  facilitate  the 
building  up  of  foreign  credits,  for  the  reason  that 
the  local  banker  is  better  acquainted  with  the  credit 
standing  of  the  debtor  than  is  the  creditor  in  a  dis- 
tant place. 

New  York  State  has  passed  a  law  giving  State 
banks  the  privilege  of  accepting  bills  arising  out  of 
domestic  as  w^ell  as  foreign  transactions.  The  advan- 
tage here  is  that  a  banker  in,  let  us  say,  Troy,  New 
York,  is  in  a  better  position  to  get  an  insight  into 
the  business  and  character  of  a  merchant  there,  than 


CREDIT  MACHINERY  55 

is  a  selling  house  in  San  Francisco,  And  for  that 
reason  the  Troy  banker  is  better  able  to  pass  judg- 
ment on  the  merchant's  worth.  Very  probably,  as 
soon  as  these  advantages  become  well  known  and  gen- 
erally utilized,  other  states  will  enact  laws  similar  to 
the  one  in  New  York. 

Quite  recently  an  amendment  to  the  Federal  Re- 
serve Act  was  passed  which  gives  member  banks,  in 
addition  to  the  power  to  accept  bills  involved  in  the 
exportation  or  importation  of  merchandise,  the  privi- 
lege of  accepting  drafts  and  bills  of  exchange  having 
not  more  than  six  months'  sight  to  run,  growing  out 
of  transactions  involving  domestic  sales  and  shipments 
of  goods,  provided  shipping  documents  conveying  or 
securing  title  are  attached  at  the  time  of  acceptance. 
This  is  practically  the  same  privilege  possessed  by  New 
York  State  banks;  and  the  amendment  will  allow 
Federal  Reserve  member  banks  to  render  effective  aid 
in  financing  commercial  transactions  in  this  country 
and  in  enabling  local  merchants  to  widen  their  field  of 
purchasing. 


CHAPTER    IV 

CLASSES  OF  CREDIT  AND  CREDIT 
MACHINERY  (Continued) 

PERSONAL    CREDIT 

Personal  credit  is  the  credit  a  merchant  extends  to 
an  individual  or  his  family  to  enable  them  to  obtain 
goods  for  their  own  use  or  consumption.  In  short, 
it  is  this  kind  of  credit  that  is  of  primary  interest  to 
the  credit  man  or  owner  of  a  retail  business.  Retail 
credit,  however,  is  of  the  utmost  importance  to  the 
jobber,  the  wholesaler,  the  manufacturer,  the  bank, 
and  every  one  along  the  entire  line  of  distribution  and 
financing.  The  jobber  extends  credit  to  the  retailer  to 
give  him  time  to  realize  on  the  merchandise  pur- 
chased. The  manufacturer  for  the  same  reason  ex- 
tends credit  to  the  jobber,  and  so  on  down  the  line. 
Let  us  assume  that  a  certain  retailer  is  very  careless  in 
his  credit  granting  and  by  reason  thereof  suffers  se- 
vere losses  and  is  unable  to  pay  the  jobber.  It  is  easy 
to  see  that  if  several  retailers  buying  of  the  one  jobber 
did  likewise  this  jobber's  position  would  be  perilous, 
and  unless  he  were  unusually  strong  it  would  not  be 
long  before  he  would  "go  to  the  wall."  His  failure, 
together  with  the  failure  of  other  jobbers,  would  mean 
ruin  to  some  manufacturer,  and  so  on  through  the 

56 


CREDIT  MACHINERY  57 

entire  mercantile  structure.  Of  course  the  poor  retail 
credit  conditions  would  have  to  be  very  extensive  in- 
deed to  bring  about  such  a  collapse  as  we  have  pic- 
tured. This,  however,  was  the  condition  in  the  South 
in  the  fall  of  19 14  immediately  after  the  outbreak  of 
the  great  European  War.  Due  to  the  cotton  situation, 
consumers  had  no  funds  with  which  to  pay  retailers. 
The  retailers  in  turn  were  unable  to  pay  the  whole- 
salers. This  caused  embarrassment  to  a  number  of 
wholesalers.  Even  though  the  retail  failures,  result- 
ing from  poor  credit  granting,  were  not  so  extensive, 
nevertheless,  the  other  merchants  in  the  chain,  that  is 
the  jobbers  and  manufacturers,  would  suffer  some  loss 
through  non-payment  by  those  retailers  who  failed  or 
through  decreased  purchases  by  the  retailers  who  re- 
mained in  business.  For  if  the  retailer  who  suffers 
losses  from  improper  credit  granting  is  to  continue  in 
business,  he  must  exact  from  the  consumer  who  pays, 
higher  prices  to  compensate  him  for  the  loss.  This 
results  in  larger  margins  of  profit  for  the  retailers  re- 
ferred to,  and  consequent  higher  prices  for  the  con- 
sumer, and  a  decrease  in  the  quantity  of  merchandise 
sold.  This  decrease  is  accounted  for  by  the  elimina- 
tion of  purchases  by  the  marginal  consumer,  who  can- 
not afford  to  pay  the  higher  prices. 

Who,  then,  suffers  by  the  retailer's  improvident 
credit  granting?  First,  of  course,  the  retailer  him- 
self. Second,  the  honest  consumer;  he  must  pay 
higher  prices.  Third,  the  manufacturer,  jobber,  and 
other  distributors;  they  suffer  financial  losses  through 
retail  failures. 

It  is  unnecessary  to  dwell  upon  the  extensive  use  of 


58  CREDITS  AND  COLLECTIONS 

retail  credit  or  upon  the  stupendous  losses,  caused 
mainly  by  improper  retail  credit  granting,  to  convince 
the  retailer  and  other  merchants  of  the  importance  of 
this  subject  and  its  relation  to  mercantile  credit.  The 
facts  are  well  known  and  are  sufficient  in  themselves. 


REASONS  FOR  CARELESS  RETAIL  CREDIT  GRANTING 

That  the  retailer  has  been  careless  in  credit  grant- 
ing is  hardly  controverted.  And  yet  how  few  have 
investigated  the  causes!  There  are  many  reasons  ac- 
counting for  this  neglect  on  the  part  of  retailers  in 
making  a  proper  or  a  sufficient  inquiry  into  the  limit 
of  credit  to  which  the  consumer  is  rightfully  entitled. 
The  first  and  foremost  reason  is  the  ignorance  of  many 
retailers  of  their  costs  of  doing  business.  If  retailers 
kept  proper  books  from  which  they  could  ascertain  the 
added  expense  of  collections  and  credit  losses,  they 
would  not  be  so  desirous  of  extending  their  business 
by  the  granting  of  unwise  credit.  The  second  reason 
is  the  retailer's  quite  natural  desire  to  outdo  his  com- 
petitor in  volume  of  business,  forgetting  entirely  about 
the  quality  of  the  business.  The  keeping  of  proper 
accounts  would  soon  impress  upon  the  merchant  the 
foolhardiness  of  doing  a  large  business  built  upon  un- 
sound credits.  The  third  reason  is  the  retailer's  fear 
of  driving  away  customers  by  asking  them  questions 
absolutely  necessary  to  enable  him  to  pass  on  the  credit 
risk.  This  fear  is  not  unfounded,  for  a  great  many 
consumers  do  have  a  false  idea  of  the  humiliation  at- 
tendant upon  such  inquiry,  and  deeply  resent  the  giv- 
ing of  any  information  that  they  consider  "strictly 


CREDIT  MACHINERY  59 

personal,"  Fourth,  retailers  are  negligent  in  setting 
a  definite  date  on  which  payment  is  expected.  Thus, 
the  retailers  do  not  take  advantage  of  the  psycholog- 
ical effect  of,  first,  naming  a  definite  day  to  meet  the 
salary  requirements  of  the  consumer,  say,  weekly  on 
Mondays,  or  monthly  on  the  first,  on  which  payment 
is  expected,  and  second,  of  getting  the  consumer  into 
a  habit  of  making  payments  at  regular  intervals,  both 
of  which  so  greatly  help  in  collections.  Fifth,  there  is 
lack  of  co-operation  among  retail  credit  grantors.  The 
baker,  the  butcher,  or  the  grocer  seldom,  if  ever,  in 
most  communities  call  upon  each  other  for  informa- 
tion as  to  how  Jones  is  paying,  or  to  what  extent  he  is 
owing.  Such  co-operation  would  prevent  over-exten- 
sion of  credit  to  one  individual.  Again,  when  Mr. 
Newcomer  arrives  in  a  town,  seldom  do  the  retailers 
of  this  town  attempt  to  find  out  his  paying  habits  in 
his  previous  residence.  Professional  crooks  could  be 
thwarted  by  such  co-operation.  Lastly,  retailers  have 
not  had  sufficient  facilities  for  obtaining  credit  infor- 
mation. Rating  books  and  reports  are  published  by 
retail  credit  bureaus  ^  in  but  few  communities.  These 
retail  bureaus  are  still  in  an  embryonic  stage,  but  they 
are  doing  a  great  deal  in  dispensing  information  con- 
cerning the  credit  standing  of  consumers  in  the  com- 
munity. 

How  are  these  conditions  to  be  remedied  and  how 
is  the  standard  of  retail  credit  granting  to  be  raised? 
These  questions  are  vital  to  every  merchant  who  would 
further  safeguard  his  own  interests.     Before  we  can 

^  A  thorough  discussion  of  the  organization  and  workings 
of  retail  credit  bureaus  will  be  found  on  page  151,  post. 


6o  CREDITS  AND  COLLECTIONS 

attempt  to  discuss  them  it  will  be  necessary  to  set  forth 
certain  principles  governing  the  proper  basis  for  retail 
credit  granting. 

THE  PROPER  BASIS  FOR  RETAIL  CREDIT   GRANTING 

In  the  granting  of  retail  credit,  as  in  the  granting 
of  any  credit,  there  are  three  factors  controlling  the 
limit  of  credit  to  be  granted — character,  capacity  and 
capital.  The  consumer's  character  is  all  important. 
A  man  with  character  of  the  right  kind  will  not  at- 
tempt to  purchase  what  he  does  not  expect  to  be  will- 
ing and  able  to  pay  for,  at  the  proper  time.  Even 
should  a  man  with  character  suddenly  meet  with  re- 
verses, and  find  himself  temporarily  unable  to  pay,  he 
could  be  relied  upon  to  pay  as  soon  as  possible  under 
the  circumstances.  But  the  retailer  should  consider 
not  only  the  character  of  the  credit  applicant,  but  also 
his  capacity,  his  ability  to  pay  for  what  he  buys.  One 
who  purchases  beyond  his  means,  that  is,  beyond  his 
income,  or  extravagantly  and  carelessly,  should  not  be 
entitled  to  credit.  On  the  other  hand  the  wealth  or 
capital  of  a  person  should  not  be  given  too  great  a 
consideration.  While  it  is  true  that  one  who  is  slow 
and  negligent  in  making  payments  and  is  wealthy  can 
probably  eventually  be  compelled  to  pay,  the  expense 
of  collecting  and  the  time  required  to  make  the  col- 
lection would  hardly  warrant  granting  credit  to  such 
a  person. 

There  are  a  ntmiber  of  methods  by  which  to  test 
these  three  factors  in  the  credit  risk.  The  best  crite- 
rion is  the  past  record  of  the  credit  applicant.     How 


CREDIT  MACHINERY  6i 

has  he  met  his  obligations  in  the  past  here  and  else- 
where? How  he  has  paid  his  debts  at  this  establish- 
ment, the  retailer  can  ascertain  from  his  own  books. 
This  again  illustrates  the  importance  to  the  retailer 
of  keeping  proper  books.  How  the  consumer  has  paid 
his  debts  at  the  other  retailers  can  only  be  determined 
by  inquiry  at  the  other  shops  or  at  a  central  credit 
information  bureau.  For  this  purpose  there  must  be 
proper  co-operation  among  the  retailers.  It  is  indeed 
important  to  find  out  the  record  of  the  consumer  at 
other  stores,  for  who  can  tell  but  that  the  consumer 
is  compelled  to  deal  at  one  store  because  he  has  de- 
stroyed his  credit  standing  elsewhere.  By  this  means, 
moreover,  the  retailer  is  able  to  find  out  the  consum- 
er's habit  of  paying,  promptly  or  otherwise,  and  if  the 
consumer  changes  that  habit  the  retailer  will  immedi- 
ately be  put  on  his  guard. 

The  retailer  will  do  well  to  find  out  the  employment 
of  the  consumer,  when  he  is  paid,  and  whether  or  not 
such  employment  is  seasonal  and,  if  possible,  the  in- 
come derived.  With  such  information  at  hand  the 
retailer  knows  when  to  expect  payment  and  can  help 
form  a  regular  habit  of  paying.  The  writer  realizes 
that  a  great  many  are  reluctant  to  give  information  of 
what  they  consider  ''personal  affairs,"  and  that  the 
retailer  is  compelled  to  resort  to  subtle  means  to  secure 
the  information.  A  great  deal  of  educational  work 
is  necessary  to  make  the  good  credit  risk  realize  that 
he  is  paying  for  the  defaults  of  the  poorer  credit  risk 
and  professional  beat.  As  soon  as  this  is  sufficiently 
impressed  upon  all  consumers,  the  one  who  intends 
and  is  able  to  pay  his  debts  will  no  longer  hesitate  to 


62  CREDITS  AND  COLLECTIONS 

give  this  information,  and  others  may  be  looked  upon 
with  suspicion. 

Another  important  matter  to  consider  is  the  per- 
sonal habits  of  the  consumer  and  his  family.  Do  they 
practice  due  economy,  or  do  they  attempt  to  live 
beyond  their  means?  Their  inclinations  in  dress, 
pleasure  and  companions  should  likewise  be  kept  in 
view  when  granting  credit.  In  this  connection  the 
wisdom  of  the  family's  purchases  should  be  taken  into 
account  and  credit  should  not  be  extended  if  the  pur- 
chaser is  buying  beyond  his  requirements. 

Were  the  retailer  to  practice  these  suggestions  he 
would  suffer  fewer  credit  losses,  and  the  other  mer- 
chants in  the  credit  chain  would  all  be  helped.  Yet, 
for  reasons  we  have  pointed  out,  the  retailer  has  been 
inclined  to  be  careless  about  his  credit  granting.  The 
question  arises  then,  how  can  the  retail  credit  be  raised 
to  a  proper  standard?  The  answer  is,  simply  by  the 
proper  education  of  the  retailer  and  the  consumer  up 
to  these  standards.  We  have  pointed  out  that  whole- 
salers and  manufacturers  and  other  large  merchants 
were  the  ones  who  had  to  suffer  eventually  as  the  re- 
sult of  poor  retail  credit  granting,  and  yet  but  very 
few  have  either  realized  this  or  raised  a  hand  to  help 
lift  retail  credit  out  of  its  more  or  less  chaotic  con- 
dition. The  most  important  thing  the  retailer  must  be 
taught  is  why  and  how  to  keep  proper  books  of  ac- 
count. Fortunately,  the  National  Association  and  va- 
rious local  associations  of  Credit  Men  are  accomplish- 
ing a  great  deal  along  these  lines.  Furthermore,  retail 
merchants  and  their  credit  men  are  learning  the  impor- 
tance of  co-operation  and  are  practicing  it  in  various 


CREDIT  MACHINERY  63 

communities.     In  the  future  we  may  expect  to  see 
more  scientific  retail  credit  granting. 

MERCANTILE    CREDIT 

Mercantile  credit  we  have  described  as  the  credit 
one  merchant  obtains  from  another  when  goods  are 
purchased  on  time  for  resale.  Applying  our  earlier 
definition,^  it  is  the  power  to  secure  goods  for  resale 
in  exchange  for  a  promise  to  pay  at  some  specified 
future  time.  Transactions  giving  rise  to  mercantile 
credit  are  on  a  very  much  more  extensive  scale  than 
are  those  transactions  involving  personal  credit.  The 
result  is  a  more  highly  developed  and  sensitive  system 
of  credits. 

The  retailer  requires  credit  when  he  makes  a  pur- 
chase so  that  he  may  have  sufficient  time  to  sell  the 
goods  to  the  consumer  and  enable  him  to  repay  the 
jobbers  with  the  proceeds.  The  jobber,  in  turn,  must 
be  given  time  enough  to  collect  from  the  retailer  be- 
fore the  manufacturer  can  look  for  payment.  The 
manufacturer  obtains  credit  from  the  wholesaler  or 
selling  agent,  who  in  turn  looks  for  credit  to  the  mills 
or  first  manufacturer.  The  grower  or  original  pro- 
ducer is  seldom  in  a  position  to  extend  credit  to  the 
mills,  and  so  the  mills  must  look  almost  exclusively 
to  financial  houses  for  any  credit  accommodations  they 
require.  A  product  does  not  necessarily  pass  through 
the  hands  of  all  the  merchants  described ;  some  prod- 
ucts do;  others  need  only  be  handled  by  one  or  two 
of  the  middlemen. 

^  See  page  4,  ante. 


64  CREDITS  AND  COLLECTIONS 

The  reader  must  avoid  any  impression  that  one  mer- 
chant may  look  to  the  one  who  handles  the  goods 
earlier  in  the  chain  for  all  the  capital  or  credit  needed 
in  the  conduct  of  his  business.  As  a  matter  of  fact  it 
is  only  to  the  extent  of  the  original  cost  of  the  goods 
that  a  merchant  obtains  mercantile  credit.  Each  mer- 
chant along  the  line  contributes  something  to  the 
goods.  For  example,  in  the  case  of  cotton  goods,  the 
ftiills  turn  the  raw  cotton  into  cloth,  the  converter  may 
dye  it,  the  manufacturer  makes  up  garments,  the 
jobber  prepares  the  garments  for  selling  and  shipment 
in  sufficiently  small  quantities  to  the  retailer.  Each 
merchant  requires  capital  to  pay  not  only  for  the 
goods,  but  also  for  the  cost  of  labor  applied  to  the 
goods  while  they  are  in  his  hands.  The  labor  and 
overhead  costs  must  be  financed  out  of  the  merchant's 
original  capital  or  out  of  funds  borrowed  from  banks 
or  other  financial  institutions.  The  cost  of  the  ma- 
terials, however,  may  be  financed  by  the  credit  ob- 
tained from  the  merchant  from  whom  the  purchases 
were  made.  But  the  mill  or  merchant  who  first  pur- 
chases from  the  grower  usually  does  not  obtain  credit 
from  the  grower,  and  therefore  must  be  prepared  to 
finance  his  purchases  by  other  means. 

From  the  foregoing  it  is  apparent  that  the  main 
function  of  mercantile  credit  is  to  facilitate  the  ex- 
change of  goods  from  the  producer  to  the  consumer. 
It  is  manifest  that  a  merchant  requires  credit  for  only 
so  long  a  time  as  it  takes  him  to  turn  over  the  goods 
purchased.  The  terms  of  credit  are  also  dependent 
upon  the  facilities  for  easy  purchasing  and  quick  de- 
livery. 


CREDIT  MACHINERY  65 

Formerly  it  was  necessary  to  give  very  long  time 
credit.  The  retailer  came  to  the  jobber  once  or  twice 
a  year  to  make  purchases.  Travel  facilities  were  ex- 
tremely poor  and  the  journey  was  a  long  one,  causing 
a  great  loss  of  time  to  the  retailer.  The  retailer,  for 
that  reason,  had  to  be  satisfied  with  trips  at  infre- 
quent intervals.  As  a  result  the  retailer  was  compelled 
to  estimate  the  demand  far  in  advance  of  the  season, 
and  naturally  he  bought  a  large  stock.  The  shipment 
of  the  goods  likewise  consumed  a  very  long  time. 
Necessarily  then,  long  term  credit,  from  six  to  twelve 
months,  was  extended.  The  jobber  then  required  a 
promissory  note  from  the  retailer,  so  that  he  might 
discount  it  at  his  bank  and  raise  funds  to  continue  his 
business.^  The  retailer's  periodic  visits  to  the  jobber 
brought  about  a  close  personal  contact  and  relation- 
ship between  them.  This  relationship  was  at  that  time 
practically  the  sole  basis  of  credit  granting.  At  any 
rate  the  jobber  relied  almost  entirely  on  his  ability  to 
judge  the  credit  risk  from  these  personal  meetings. 
There  were  practically  no  other  facilities  for  gather- 
ing information  regarding  the  credit  standing  of  the 
retailer. 

Conditions  to-day  are  entirely  changed.  The  tele- 
phone, the  telegraph  and  the  modern  mail  service  have 
made  it  possible  for  the  retailer  to  place  an  order  in  a 
minimum  time  in  accordance  with  present  or  immedi- 
ately pending  demands.  The  improved  means  of 
transportation,  the  railroads  and  faster  ships,  reduce 
the  time  consumed  and  hazards  of  shipment.  No 
longer  is  it  considered  necessary  to  extend  the  terms 

1  See  page  41,  supra. 


66  CREDITS  AND  COLLECTIONS 

of  credit  required  by  the  older  conditions.  More- 
over, the  extensive  development  of  banking  and  the 
more  liberal  banking  accommodations  have  been  an 
incentive  for  the  business  man  to  look  to  his  bank 
for  loans.  With  the  proceeds  of  the  bank  loan  the 
merchant  may  pay  his  bills  promptly  and  effect  sav- 
ings by  taking  advantage  of  discounts.  Then  too, 
where  long  term  credit  is  given,  higher  prices  must 
inevitably  be  obtained  to  compensate  the  seller  for  the 
increased  risk  and  the  interest  on  the  capital  tied  up 
in  the  merchandise  sold.  All  of  these  factors  have 
contributed  in  bringing  about  a  condition  of  shorter 
credit  terms. 

TERMS  OF  CREDIT 

Purchases  are  now  usually  made  on  terms  ranging 
from  ten  days  to  six  months;  longer  terms  are  excep- 
tional. The  average  term  in  the  United  States  to-day 
is  from  thirty  to  ninety  days.  The  terms  vary  with 
the  different  lines  of  business.  Terms  granted  by  dif- 
ferent houses  in  the  same  line  have  sometimes  varied. 
Terms  extended  to  different  customers  of  the  same 
house  are  now  and  then  not  the  same.  There  is  no 
rigid  rule  as  to  the  length  of  credit  granted;  the  ex- 
tension of  credit  being  largely  dependent  on  individual 
conditions.  The  tendency,  however,  is  undoubtedly 
to  extend  credit  only  long  enough  to  give  the  pur- 
chaser an  opportunity  to  realize  on  the  merchandise 
purchased.  Thus  we  find  thirty  to  sixty  days  the 
prevalent  terms  in  the  grocery  trade.  In  the  jewelry 
trade,  where  the  average  turnover  is  less  frequent,  we 


CREDIT  MACHINERY  67 

find  from  sixty  to  more  than  one  hundred  and  twenty 
days  given. 

DISCOUNTS 

Where  credit  is  extended,  a  premium  or  discount  is 
usually  offered  the  purchasing  house  for  cash  pay- 
ment. The  amount  or  rate  of  discount  varies  quite  as 
widely  as  do  the  terms  of  credit  extended.  As  a  rule 
the  rate  of  discount  varies  directly  with  the  term  of 
credit  extended. 

If  the  term  of  credit  were  thirty  days  and  the  dis- 
count given  for  cash  two  per  cent,  the  invoice  would 
be  marked  2/10  net  30,  meaning  2  per  cent  discount 
is  allowed  if  paid  within  10  days,  otherwise  the  net 
or  full  amount  of  the  bill  is  due  30  days  after  date  of 
invoice.  Under  these  terms,  one  who  buys  a  bill  of 
goods  amounting  to  $1,000  on  March  i,  19 16,  may 
deduct  $20  if  he  pays  the  bill  on  or  before  March  11. 
If  the  purchaser  does  not  pay  on  March  11,  he  loses 
the  discount.  In  the  latter  case  the  purchaser  prac- 
tically pays  $20  for  the  use  of  $980  (the  amount  he 
could  have  paid  March  11)  for  20  days  (the  interim 
between  March  11  and  March  31,  the  day  the  bill  is 
due  and  is  supposed  to  be  paid).  In  other  words,  the 
purchaser  in  this  case  pays  at  the  rate  of  37.2  per  cent 
a  year  for  the  use  of  the  money  or  goods,  by  not  pay- 
ing within  10  days  and  taking  advantage  of  his  dis- 
count. Measured  in  terms  of  discount,  the  discount  in 
the  same  case  would  amount  to  36  per  cent  a  year. 
In  different  businesses  the  rate  of  discount  varies  all 
the  way  from  six  per  cent  to  seventy-two  per  cent  a 
year. 


68  CREDITS  AND  COLLECTIONS 

COMMERCIAL  VERSUS  BANKING  DISCOUNTS 

In  the  great  majority  of  cases  the  discount  given  by 
mercantile  houses  is  considerably  larger  than  the  dis- 
count charged  by  banks  for  lending  funds,  so  that,  for 
one  able  to  do  so,  to  borrow  from  the  bank  and  pay 
cash  and  take  advantage  of  discounts  offered  would 
be  extremely  profitable.  Competitive  business  condi- 
tions now  demand  that  a  merchant  must,  wherever 
possible,  take  advantage  of  discounts  in  order  to  leave 
him  a  sufficient  margin  of  profit. 

Banking  loans  are  far  more  difficult  to  obtain  than 
mercantile  loans,  and  that  is  the  reason  why  there  is 
such  an  evident  difference  in  rates  of  discount.  One 
must  be  able  to  measure  up  to  higher  credit  standards 
to  borrow  money  from  a  bank  than  to  purchase  mer- 
chandise on  credit.  The  explanation  of  this  difference 
in  credit  standards  lies  in  the  fact  that  the  mercan- 
tile house  as  a  rule  has  a  wider  margin  of  profit  than 
the  bank  and  can  therefore  take  greater  risks.  Obvi- 
ously, then,  a  merchant  who  has  not  sufficient  work- 
ing capital  and  who  is  not  able  to  secure  adequate 
banking  accommodations  will  be  unable  to  effect  the 
savings  possible  through  taking  advantage  of  the  mer- 
cantile discounts.  However,  there  are  some  merchants 
who  are  able  to  pay  cash,  but  who  either  through 
ignorance  or  carelessness  sometimes  neglect  to  take 
advantage  of  discounts,  and  suffer  a  consequent  loss 
in  their  profit. 


CREDIT  MACHINERY  69 

CASH,  C.  O.  D.  AND  C.  B.  D.  TERMS 

Sometimes  when  a  purchaser  is  in  poor  credit  stand- 
ing the  seller  does  not  desire  to  extend  any  credit,  or 
to  assume  any  risk.  There  has  been  so  much  misun- 
derstanding about  this  very  point,  that  it  seems  neces- 
sary to  classify  the  meaning  of  different  terms  where 
the  intention  of  the  seller  is  to  extend  no  credit.  In 
only  one  case  does  the  seller  assume  no  risk  and  extend 
no  credit ;  that  is  where  the  purchaser  pays  cash  before 
the  goods  are  shipped.  The  common  expression  for 
such  terms  is  "C.  B,  D.",  cash  before  dehvery.  Where 
goods  are  sent  "C.  O.  D.",  cash  on  delivery,  or 
"sight  draft  with  Bill  of  Lading  attached,"  the  pur- 
chaser does  not  pay  until  the  goods,  merchandise  or 
bill  of  lading  is  delivered  to  him.^ 

The  seller  here  assumes  the  risk  of  having  the  pur- 
chaser refuse  to  accept  the  goods,  in  which  case  the 
seller  would  lose  the  freight  both  ways,  unless  he 
were  fortunate  enough  to  sell  the  same  goods  to  an- 
other merchant  along  the  same  route.  Realizing  that, 
scheming  merchants,  to  whom  the  seller  will  not  grant 
credit,  frequently  order  goods  shipped  C.  O.  D.    Upon 

^  When  goods  are  sent  C.O.D.,  it  is  usually  the  desire  of  the 
seller  that  the  purchaser  shall  be  given  no  credit.  The  seller, 
therefore,  should  demand  currency  or  a  certified  check  and 
should  refuse  to  accept  a  check  of  the  purchaser.  It  is  quite 
possible  that  the  bank  on  which  the  purchaser's  check  is 
drawn  may  not  have  sufficient  funds  of  the  purchaser  to  honor 
the  check.  Numerous  other  contingencies  might  arise  to  pre- 
vent the  bank's  honoring  the  check,  and  the  seller  who  does 
not  wish  to  extend  credit  should  never  accept  a  check  in 
payment,  unless  it  is  certified  by  a  solvent  bank. 


70  CREDITS  AND  COLLECTIONS 

the  arrival  of  the  goods,  these  merchants,  pleading 
lack  of  immediate  funds,  refuse  to  accept  the  goods  in 
accordance  with  the  original  terms.  Instead  they  ask 
the  jobber  to  allow  them  to  take  the  goods  and  remit 
in  ten  days.  Thus  they  hope  to  compel  the  jobber  to 
extend  credit.  The  seller  should  be  on  his  guard 
against  such  merchants  and  should  demand  a  de- 
posit before  the  goods  are  shipped  to  cover  the  risk 
involved. 

In  another  case,  when  goods  are  sold  for  "cash," 
many  merchants  are  possessed  of  the  mistaken  idea 
that  no  credit  is  extended.  Such  is  not  the  case. 
Where  goods  are  shipped  "cash,"  there  is  an  expressed 
or  an  implied  understanding  that  the  purchaser  is 
given  ten  days'  credit.  The  ten  days  is  allowed  him  to 
check  the  goods  received  and  verify  the  invoice.  The 
bill  is  due  at  the  end  of  ten  days  and,  if  not  paid,  the 
seller  can  resort  to  only  the  same  remedies  that  are 
open  to  any  other  credit  grantor.  The  credit  stand- 
ing of  one  to  whom  goods  are  sold  on  "cash"  terms 
should  be  just  as  thoroughly  examined  as  one  who  is 
sold  on  regular  terms,  for  practically  the  same  moral 
risk  is  involved  in  both  cases. 


DATING 

Similar  in  many  respects  to  the  giving  of  discounts, 
is  the  custom  of  dating  ahead.  By  dating  ahead  is 
meant  that  the  terms  of  discount  do  not  begin  to  op- 
erate until  the  expiration  of  the  period  of  dating.  The 
theory  of  dating  is  simple  enough,  but  custom  in  vari- 
ous lines  of  business  has  imposed  on  its  practical  appli- 


CREDIT  MACHINERY  71 

cation  some  seemingly  peculiar  interpretations.  For 
example,  in  the  lace  goods  and  silk  goods  business  the 
regular  trade  terms  are  ''7/10 — ^o,"  ^  which  means 
that  60  days  dating  is  given,  and  that  7  per  cent  dis- 
count is  allowed  if  the  bill  is  paid  within  10  days  after 
the  60-day  dating.  Let  us  assume,  for  example,  that 
a  merchant  buys  a  $1,000  bill  of  goods  January  i, 
1916,  on  the  terms  "7/10 — 60."  The  practical  work- 
ing out  of  such  terms  would  be  as  follows :  The  bill 
less  discount  ($930)  is  due  in  70  days,  that  is,  on 
March  10,  and  if  paid  on  March  10,  the  merchant  may 
deduct  7  per  cent  from  the  gross;  that  is  pay  $930. 
The  purchaser,  however,  has  the  option  of  paying  any 
time  before  March  10.  By  virtue  of  trade  custom,  if 
the  merchant  pays  on  or  before  January  11  he  can 
deduct  an  extra  i  per  cent  from  the  gross,  i.e.,  pay 
$920.  If  he  pays  between  January  11  and  March  10, 
he  can  deduct  from  the  net  amount  of  $930  interest 
at  the  rate  of  six  per  cent  a  year. 

Theoretically  and  legally,  if  the  bill  is  not  paid  until 
March  10,  the  purchaser  is  not  entitled  to  deduct  any 
discount  and  the  seller  can  legally  demand  payment  of 
the  gross  amount  of  $1,000.  The  forfeiture  of  the 
$70  discount  is  considered  a  penalty  imposed  to  compel 
prompt  payment.  This  legal  rule,  however,  has  been 
greatly  modified  in  commercial  practice,  the  degree  of 
modification  depending  to  some  extent  upon  the  policy 
and  position  of  the  selling  house.  Thus  we  find  a 
great  many  selling  houses  permit  the  purchaser,  if  he 
pays  after  March  10,  to  deduct  7  per  cent  from  the 
gross,  and  add  to  the  net  amount  ($930)  interest  at 

^  Sometimes  written  "7/10 — 60  extra." 


-j^  CREDITS  AND  COLLECTIONS 

the  rate  of  six  per  cent  a  year,  or,  in  some  cases,  at  the 
rate  of  one  per  cent  a  month. ^ 

It  would  appear  therefore  in  this  case,  that  the  7 
per  cent  discount  is  not  a  discount  at  all,  but  merely 
a  masque  for  the  real  selling  price,  and  further  that 
the  dating  is  just  another  way  of  stating  the  time 
credit  is  extended.  The  bill  is  really  only  $930  and  is 
due  ten  days  after  the  period  of  dating.  The  adding 
of  interest  is  simply  a  measure  to  stimulate  prompt 
payment.  The  extra  per  cent  allowed  off  the  gross  for 
payment  within  10  days  after  goods  are  shipped  is  the 
true  discount. 

The  same  custom  is  found  in  many  other  lines  of 
business.  The  regular  terms  in  the  cotton  goods  busi- 
ness, for  example,  are  "2/10 — 60  days  dating,"  which 
means  the  bill  less  2  per  cent  is  due  in  70  days ;  an 
extra  discount  of  i  per  cent  is  allowed  in  lieu  of  the 
dating  for  payment  within  10  days;  and  interest  on 
the  net  is  deducted  if  payment  is  made  between  the 
10  and  70  day  periods. 

SEASON    DATING 

Another  form  of  dating  is  season  dating,  the  terms 
of   which  vary  with  the  different  lines  of  business, 

^  Even  where  the  rule  has  been  thus  modified,  if  the  selling 
house  places  the  account  in  the  hands  of  an  attorney  for  col- 
lection, the  practice  is  for  the  attorney  to  collect  the  gross 
amount,  and  allow  no  discount  deduction.  Likewise,  in  case 
the  purchaser  becomes  bankrupt,  the  seller  may  legally  file 
his  claim  for  the  gross  amount. 


CREDIT  MACHINERY  73 

some  ninety  days,  some  six  months,  some  eight 
months.  Season  dating  is  used  to  induce  a  merchant 
to  order  goods  in  advance  of  production  or  importa- 
tion. A  merchant,  for  example,  may  order  Spring 
goods  the  preceding  Fall.  The  risks  of  change  in 
style,  bad  business  conditions,  and  lack  of  demand,  are 
thus  transferred  from  the  manufacturer  or  importer 
to  the  retailer  or  secondary  manufacturer.  For  this 
reason  the  seller  is  willing  to  compensate  the  purchaser 
by  extending  very  favorable  terms  of  credit. 

Season  dating  may  work  out  as  follows :  Upon 
receiving  the  order  the  manufacturer  immediately  be- 
gins to  make  the  goods,  or  the  importer  immediately 
orders  them  from  abroad.  As  soon  as  they  are  ready, 
probably  December  or  January,  the  goods  are  deliv- 
ered and  an  invoice  sent  to  the  purchaser.  The  in- 
voice is  given  the  season  dating,  say  May  i,  and  the 
regular  terms  of  discount  do  not  begin  to  operate  until 
then.  The  purchaser,  however,  may  pay  at  any  time 
before  May  i  and  may  deduct  interest  at  the  rate  of 
six  per  cent  a  year  from  the  net  amount  of  the  bill. 
The  distinct  advantages  to  the  seller  are  that  advance 
orders  induced  by  season  dating  transfer  the  risk  of 
changes  in  fashion  to  the  purchaser  and  enable  the 
manufacturer  better  to  gauge  his  production.  On  the 
other  hand  the  seller  must  give  very  long  term  credit. 
The  purchaser  enjoys  the  long  term  credit,  for  it  al- 
lows him  plenty  of  time  to  sell  the  goods.  The  pur- 
chaser, however,  must  carry  more  insurance  and  pro- 
vide larger  quarters  for  the  stock.  Moreover,  there 
is  the  danger  that  the  purchaser,  encouraged  by  the 
long  term  season  dating,  may  optimistically  overesti- 


74  CREDITS  AND  COLLECTIONS 

mate  the  demands  of  the  coming  season,  overstock 
with  merchandise,  and  subsequently  sustain  heavy 
losses  through  having  on  hand  out-of -style  and  unsale- 
able merchandise. 


END  OF  MONTH  TERMS 

A  more  recent  development  that  has  had  a  decided 
tendency  to  lengthen  the  terms  of  credit  has  been  the 
creation  of  "end  of  month"  ^  terms.  Merchants  who 
were  doing  a  very  active  business  and  made  purchases 
almost  every  day  during  the  month  found  it  very  in- 
convenient to  make  payments  every  day  during  the 
month;  and  yet  this  would  be  necessary  if  they  were 
to  avail  themselves  of  the  cash  discounts.  The  larger 
merchants  who  were  such  active  buyers  requested  the 
selling  houses  to  permit  them  to  pay  all  their  bills 
once  a  month  and  take  advantage  of  the  regular  dis- 
count. The  selling  houses  granted  this  request  for 
they  wished  to  keep  the  good-will  and  business  of  such 
active  accounts.  In  this  way  arose  the  custom  of  per- 
mitting large  houses  to  pay  on  the  tenth  day  of  the 
month  all  the  bills  of  the  previous  month  and  deduct 
the  cash  discount.  In  other  words,  goods  shipped  be- 
tween January  i  and  January  31,  would  be  dated  Feb- 
ruary I.  Such  terms  are,  of  course,  created  only  by 
special  agreement  and  not  by  trade  custom.  Some 
houses  have  amended  the  "end  of  month  terms"  to 
the  extent  that  goods  shipped  between  the  first  and 
fifteenth  of  January  are  dated  January  15,  and  goods 
shipped  between  January  15  and  31  are  dated  Feb- 

^  Frequently  abbreviated  E.  O.  M. 


CREDIT  MACHINERY  75 

ruary  i.  These  terms  are  far  more  equitable  to  both 
seller  and  purchaser  than  are  the  former,  for  certainly 
few  purchasers  can  plead  inconvenience  in  making 
semi-monthly  payments. 

The  "end  of  the  month"  terms  have  been  subject  to 
serious  abuses.  Some  houses  enjoying  the  privilege 
of  end  of  month  terms  have  adopted  the  scheme  of 
stamping  on  their  orders  the  following  notice:  "All 
shipments  made  between  the  twenty-fifth  and  end  of 
month  are  to  be  considered  dated  as  first  of  following 
month,  subject  to  end  of  month  terms."  Obviously 
this  is  a  mere  subterfuge  for  compelling  the  extension 
of  thirty  days'  extra  credit.  Another  insidious  scheme 
purchasing  houses  have  resorted  to  in  an  effort  to 
extend  the  terms  of  credit,  is  that  of  sending  a  de- 
partment buyer  to  the  selling  house  to  make  a  pur- 
chase. The  department  buyer  informs  the  selling 
house  that  he  has  bought  up  to  the  limit  allowed  him 
during  the  current  month,  but  that  he  will  place  a 
certain  order  if  the  goods  are  billed  the  following 
month.  This  practice  is  to  be  no  less  sharply  con- 
demned than  the  one  mentioned  above,  for  it  compels 
the  selling  house  unwittingly  to  give  a  decided  prefer- 
ence to  one  customer  over  all  others. 

R.   O.    G.    TERMS 

All  invoices  are  dated  the  day  goods  are  shipped. 
If  a  house  in  New  York  sells  goods  throughout  the 
country  on  "2/10  net  60"  terms,  it  is  very  apparent 
that  a  house  in  Jersey  City  would  enjoy  a  distinct 
advantage  over  a  house  in  San  Francisco.    The  former 


76  CREDITS  AND  COLLECTIONS 

would  receive  its  goods  within  twenty-four  hours  and 
have  time  to  check  them  up  before  paying  within  ten 
days,  while  the  house  in  San  Francisco  would  prob- 
ably have  to  pay  before  the  goods  are  received  in 
order  to  take  the  cash  discount.  To  overcome  this 
disadvantage  to  distant  purchasers,  many  houses  date 
invoices  to  some  of  their  customers  "receipt-of- 
goods,"  ^  which  means  the  time  allowed  for  taking 
discount  is  measured  from  the  time  the  goods  are  re- 
ceived by  the  purchaser.  If  the  purchaser,  however, 
does  not  avail  himself  of  the  discount  within  the  period 
allowed,  the  regular  terms  are  usually  measured  from 
the  date  of  shipment.  The  purchaser  then  enjoys  the 
benefit  of  R.  O.  G.  terms  only  when  he  takes  advan- 
tage of  the  discount.  By  special  agreement  these 
terms  are  extended  by  many  eastern  houses  to  the 
larger  firms  located  in  the  West  and  on  the  Pacific 
Coast. 
'  Often  abbreviated  R.  O.  G. 


<r:HAPTER   V 

THE  DUTIES  AND  QUALIFICATIONS  OF  THE 
CREDIT  MAN 

Not  many  years  ago  credit  was  dispensed  by  the 
proprietor  of  an  establishment.  He  made  it  a  point 
to  come  into  personal  contact  with  his  customers  at 
their  periodic  visits  to  his  place  of  business.  In  this 
way  the  proprietor  was  able  to  determine  the  quality 
of  the  risk  by  personal  observation.  With  the  develop- 
ment of  the  country  and  the  attendant  growth  of 
business  and  the  increase  in  the  number  and  variety  of 
accounts,  it  became  necessary  to  have  salesmen  travel 
to  every  section  of  the  country,  and  no  longer  did  the 
proprietor  come  into  personal  contact  with  most  of  his 
customers.  For  these  reasons  he  delegated  part  of  the 
responsibility  of  passing  on  the  credit  risks  to  the 
bookkeeper.  At  first  the  bookkeeper  found  himself 
equal  to  the  task.  Later,  however,  with  a  still  greater 
intensification  of  trade,  it  became  necessary  for  the 
bookkeeper  to  be  as  well  informed  regarding  the  status 
of  a  concern  in  Maine  or  in  California  as  of  the  status 
of  one  doing  business  in  his  own  city.  With  this  in- 
tensification of  trade,  numerous  agencies  for  obtaining 
credit  information,  concerning  the  credit  worth  of 
debtors,  were  established.  As  these  sources  of  infor- 
mation multiplied,  it  became  a  physical  as  well  as  an 

77 


78  CREDITS  AND  COLLECTIONS 

intellectual  impossibility  for  the  bookkeeper,  burdened 
with  his  routine  duties,  to  attend  properly  to  the  credit 
division  of  his  institution.  The  outcome  of  these  con- 
ditions was  the  employment  of  a  specialist,  an  expert, 
to  study  credit  from  the  proper  standpoint  and  to 
manage  the  activities  of  the  credit  department.  To 
fill  this  position  it  was  necessary  to  have  a  man  who 
not  only  occupied  himself  with  the  onerous  work  of 
looking  after  accounts,  but  also  with  the  vital  task  of 
constructively  building  up  the  sales.  He  was  to  have 
a  prominent  part  in,  if  he  did  not  control,  the  promo- 
tion of  sales,  the  life  of  a  business.  Thus  the  "credit 
man"  came  to  assume  many  and  resjx)nsible  duties. 

DUTIES  OF  THE  CREDIT   MAN 

Let  us  now  examine  the  duties  of  this  important 
professional  credit  man  who  was  thus  evolved  in  the 
course  of  industrial  expansion.  At  the  outset  we  must 
bear  in  mind  that  the  fundamental  aim  of  all  trade  is 
to  make  profit.  This  aim  is  attained  through  the 
stimulation  of  the  profitable  sales  through  the  channels 
of  industry.  It  is  the  task  of  the  true  credit  man  to 
engineer  this  progress  of  sales.  This  phase  of  the 
credit  man's  work  is  often  not  considered,  yet  it  is 
very  important.  We  must  therefore  emphasize  the 
fact  that  the  credit  man's  duty  is  not  simply  to  reduce 
losses.  To  reduce  losses  only  would  be  a  compara- 
tively easy  task,  for  it  would  not  be  very  difficult  to 
substantially  eliminate  bad  debts,  provided  the  credit 
man  were  to  decline  to  take  all  but  Ai  risks.  It  is 
obvious,  however,  that  with  such  a  policy  his  firm 


THE  CREDIT  MAN^  79 

would  lose  considerable  business.  A  credit  man  whose 
conception  of  duty  is  narrowly  restricted  to  the  limita- 
tion of  losses  would  become  an  obstacle  to  the  main 
purpose  for  which  the  business  is  organized,  viz.,  of 
making  profit  from  sales.  While  a  credit  man,  there- 
fore, should  be  keen  in  detecting  unsafe  risks,  he  must 
ever  bear  in  mind  that  the  taking  of  the  legitimate 
risks  is  the  essence  of  business.  The  above  observa- 
tions can  be  summarized  in  the  following  maxim : 
The  function  of  the  credit  man  is  to  have  a  minimum 
of  losses  with  a  maximum  of  sales.  *--\ 

A  discussion  of  the  duties  of  the  credit  man,  then, 
can  be  subdivided  as  follows:  First,  keeping  dozum 
losses;  second,  increasing  sales.  To  attain  this  double 
object,  the  credit  man  must  have  a  well  organized  de- 
partment, trained  assistants,  and  a  thorough  co-opera- 
tion with  the  sales  department.  These  will  be  dis- 
cussed in  detail  in  a  later  chapter.  At  this  point,  how- 
ever, it  is  appropriate  that  we  briefly  consider  the 
immediate  work  of  the  credit  man.  ^ 

FAMILIARITY   WITH    THE  ACCOUNTS 

In  the  first  place,  the  credit  man  must  be  reasonably 
familiar  with  the  accounts  on  the  ledger.  In  a  general 
way  he  should  have  a  fairly  accurate  knowledge  of  the 
activity  of  each  account,  including  the  average  amount 
of  purchases  made  by  the  customer  during  different 
seasons  of  the  year,  the  amount  of  indebtedness,  and 
the  manner  of  making  payments.  This  knowledge  is 
necessary  to  enable  the  credit  man  to  recognize  un- 
common activity  or  other  unusual  developments  affect- 


8o  CREDITS  AND  COLLECTIONS 

ing  any  account.  The  information  is  likewise  very 
important  when  the  credit  man  is  considering  extend- 
ing further  credit  or  checking  new  orders. 

To  bring  this  information  to  the  attention  of  the 
credit  man  various  methods,  more  or  less  scientific, 
are  used.  The  usual  method  followed  by  most  credit 
men  is  to  rely  on  their  own  memory  as  far  as  pos- 
sible. Thus,  when  checking  an  order  the  credit  man 
instinctively  calculates  in  his  mind  the  status  of  the 
account,  and,  should  he  not  be  satisfied  with  his 
knowledge  of  any  particular  account,  he  will  refer  to 
the  ledger. 

However,  if  the  credit  man  personally  were  to  refer 
to  the  ledger,  he  would  be  unduly  interrupted  in  his 
work  and  lose  considerable  time  in  going  to  and  from 
the  bookkeeping  department,  which  is  usually  located 
in  another  room.  Furthermore,  were  the  credit  man 
to  inspect  the  ledger,  he  would  probably  delay  the 
work  of  the  bookkeeper.  To  avoid  these  interruptions 
and  delays,  a  ledger  report  form  to  be  filled  out  by 
the  bookkeeper  at  the  request  of  the  credit  man  has 
been  devised.     This  form  is  reproduced  herewith. 

This  form  can  also  be  used  by  the  bookkeeper  in 
calling  the  credit  man's  attention  to  abnormal  circum- 
stances that  seem  to  require  attention,  such  as  unusual 
activity  of  an  account,  purchases  by  a  debtor  who  is 
owing  for  bills  after  maturity,  past  due  accounts,  etc. 
The  usefulness  of  this  system  obviously  depends  upon 
the  extent  to  which  the  credit  man  has  trained  the 
bookkeeper.  The  credit  man  does  not  rely  entirely 
on   the   bookkeeper,    however,    for    occasionally    the 


THE  CREDIT  MAN 
Date, 

Ledger  Report 


Name _ 

Address :.. 

Business Salesman 

How  long  sold 

Highest  recent  credit Date 

Terms How  much  owing 

How  much  due 

Payments  (past) (present)... 

Rating Date  of  last  trade  look-up.. 

Remarks 


credit  man  personally  glances  at  .the  ledger  accounts, 
especially  the  doubtful  ones. 

KNOWLEDGE   OF   THE   BUSINESS   OF   CUSTOMERS 

In  the  second  place,  the  credit  man  should  have 
knowledge  of  the  essential  elements  in  the  business 
of  his  customers.  For  example,  he  should  have  infor- 
mation on  the  kind  of  business  in  which  his  customer 
is  engaged  and  the  general  prospects  for  that  business. 
The  financial  strength  and  efficiency  of  the  customer's 
organization  should  also  be  known  to  the  credit  man. 
Moreover,  he  should  be  familiar  with  the  competitive 
and  other  local  conditions  affecting  his  customers  so 


82  CREDITS  AND  COLLECTIONS 

that  he  may  better  understand  the  causes  of  any  de- 
cline that  might  occur  in  the  financial  strength  of  a 
customer.  Where  and  how  information  on  these  and 
other  points  mentioned  in  this  chapter  can  be  obtained 
will  be  fully  discussed  in  the  chapters  on  Sources  of 
Information. 

CARE  IN  OPENING  NEW  ACCOUNTS 

In  the  third  place,  having  acquired  adequate  knowl- 
edge concerning  all  the  accounts  now  on  the  books, 
the  credit  man  should  exercise  particular  pains  in  open- 
ing new  accounts.  In  fact,  before  any  new  account 
is  accepted,  sufficient  information  concerning  it  should 
be  obtained  and  then  carefully  analyzed.  How  to 
analyze  information  is  discussed  in  subsequent  chap- 
ters. If  it  appears  that  the  new  credit  applicant 
cannot  meet  the  credit  standards  of  the  house,  the 
credit  man  should  not  hesitate  to  refuse  the  ac- 
count. Of  course,  it  may  sometimes  be  advisable 
to  be  indulgent  with  old  customers,  but  there  is 
no  obligation  on  the  part  of  the  credit  man  to 
check  a  first  bill  to  a  concern  that  has  not  established 
a  satisfactory  credit  standing,  or  to  open  the  account 
of  a  newly  organized  enterprise,  in  the  composition  of 
which  he  cannot  see  the  elements  of  success.  In  fact, 
as  a  scientific  credit  grantor,  he  should  absolutely  de- 
cline credit  to  such  an  applicant.  Such  action  is  for 
the  interest  of  the  prospective  customer  as  well  as  for 
the  whole  credit  community.  It  is  by  extending  credit 
to  the  incompetent  and  undeserving  that  the  credit 


THE  CREDIT  MAN  83 

system  is  abused  and  becomes  a  menace  to  sound  busi- 
ness. 

NOTING  THE  PROGRESS  OF  ACCOUNTS 

In  the  fourth  place,  the  credit  man  should  be  vigi- 
lant in  noting  the  progress  of  accounts  already  on  the 
books  and  new  accounts  opened.  This,  on  account  of 
the  fact  that  conditions  affecting  credit  are  continually 
subject  to  change.  A  majority  of  the  notices  of  fail- 
ures come  like  bolts  of  lightning  out  of  the  clear  sky, 
and  one  of  the  pangs  of  the  conscientious  credit  man 
is  to  find  at  the  time  of  a  failure  that  his  records  are 
not  up-to-date — and  that  an  opportune  revision  of  his 
files  would  have  enabled  him  to  avert  the  loss.  Nat- 
urally it  is  not  advisable  to  have  too  much  or  dupHcity 
of  information,  but  the  credit  man  should  have  knowl- 
edge sufficiently  recent  to  free  him  from  the  necessity 
of  acting  entirely  on  blind  faith  based  on  past  per- 
formances. There  are  various  methods  for  keeping 
information  up-to-date  which  are  discussed  under 
Sources  of  Information. 

In  the  fifth  place,  if  it  appears  from  watching  the 
progress  of  the  accounts  that  any  accounts  are  be- 
coming vitally  weakened  the  credit  man  should  prune 
those  accounts  from  the  books.  Weakness  in  an  ac- 
count is  usually  disclosed  by  the  financial  statement  or 
by  persistently  slow  payments.  When  it  appears  that 
weakness  is  fundamental  and  practically  uncurable,  the 
credit  man  should  apply  himself  tactfully  to  the  task 
of  eliminating  the  account.  On  the  other  hand,  if 
the  account  is  merely  temporarily  weakened  and  will 
probably  recover  with  the  proper  guidance  and  assist- 


84  CREDITS  AND  COLLECTIONS 

ance,  the  credit  man  should  give  all  reasonable  aid 
to  the  account.  How  this  may  be  done  will  be  dis- 
cussed later. 

MAKING    COLLECTIONS 

Sixth,  after  the  credit  has  been  extended  to  a  cus- 
tomer and  the  credit  term  has  expired,  the  credit  man 
must  take  the  necessary  steps  to  collect  the  account. 
This  may  even  involve  a  law  suit  for  the  price  of  the 
merchandise,  or,  in  some  cases,  an  action  for  the  re- 
covery of  the  goods  themselves.  The  credit  man  must 
know  what  his  remedies  are  and  what  steps  he  should 
take  to  collect  an  account.  In  case  of  the  embarrass- 
ment or  insolvency  of  an  account,  a  friendly  adjust- 
ment or  settlement  may  be  necessary  and  advisable. 
Or  it  may  be  better  to  place  the  debtor  in  bankruptcy, 
in  which  case  the  credit  man  must  be  able  to  follow 
the  collection  of  an  account  through  the  bankruptcy 
proceedings.  To  this  end  a  knowledge  of  the  Bank- 
ruptcy Law  is  essential.  All  of  these  matters  are 
treated  in  detail  under  the  chapters  on  Collections, 
Creditors'  Remedies,  Adjustments  and  Bankruptcy. 


KNOWLEDGE  OF  LOCAL  CONDITIONS 

Seventh,  the  credit  man  should  have  knowledge  of 
conditions  affecting  different  sections  of  the  country  as 
well  as  particular  localities. 

This  duty  of  the  credit  man  is  readily  understood 
when  it  is  remembered  that  the  debt-paying  ability  of 
a  community  is  governed  by  its  prosperity.     But  the 


THE  CREDIT  MAN  85 

prosperity  is  governed  by  many  conditions  which  must 
be  studied  intensively  and  in  detail.  For  example, 
poor  crops  in  an  agricultural  district,  and  unemploy- 
ment or  strikes  in  a  manufacturing  district,  seriously 
impair  the  debt-paying  ability  of  the  consumers  and 
in  turn  the  retailers  in  those  districts.  So,  too,  tariff 
changes  or  other  governmental  actions  may  have  an 
important  bearing  on  the  industrial  activity  of  certain 
sections,  and  in  turn  affect  the  credit  conditions  in 
those  sections.  The  shifting  of  population  following 
a  change  in  the  location  of  a  large  industry  will  also 
influence  the  condition  of  retailers  there. 

With  all  of  these  and  other  local  and  industrial 
factors  contributing  to  the  progress  or  retrogression 
of  trade  the  true  student  of  credits  should  be  familiar 
in  order  to  be  prepared  scientifically  to  regulate  the 
extension  of  credit. 

STIMULATING    SALES 

Eighth,  the  credit  man  should  actively  assist  in 
stimulating  and  promoting  sales.  This  is  accom- 
plished, first,  by  engendering  the  spirit  of  co-operation 
with  the  sales  department ;  and,  second,  by  winning 
the  good-will  of  customers.  The  credit  man  comes 
into  contact  with  the  customer  at  the  most  delicate 
point  of  business  relations.  The  credit  man  must  rea- 
sonably trust  his  customer  and  win  the  latter's  con- 
fidence. The  credit  man,  by  giving  the  customer  assur- 
ance of  proper  and  fair  consideration,  can  very  often 
do  more  to  foster  the  business  of  an  account  than  can 
the  most  aggressive  sales  department.  * 


86  CREDITS  AND  COLLECTIONS 

CO-OPERATION  WITH  OTHER  CREDIT  MEN 

Ninth,  the  credit  man  should  co-operate  with  other 
credit  men  for  the  mutual  benefit  of  all.  Not  many 
years  ago,  to  give  to  another  firm  information  regard- 
ing an  account  was  regarded  as  harmful  disclosure 
of  trade  secrets.  Some  facts  were  given  upon  inquiry, 
but  only  with  considerable  reluctance.  The  growing 
complexities  of  credit  work,  however,  the  development 
of  agencies,  and  the  organization  of  credit  men  in  the 
National  Association  of  Credit  Men  and  its  constitu- 
ent smaller  bodies,  have  gradually  taught  the  merchant 
to  be  liberal  in  giving  credit  information.  At  present 
the  need  for  exchange  of  ideas  and  facts  is  so  well 
recognized  that  experiences  relating  to  the  credit  of 
the  customer  are  readily  imparted.  Such  information 
is  freely  given,  even  among  keen  business  rivals  with 
but  little  abuse  of  confidence.  Sometimes,  of  course, 
discretion  must  be  used  to  protect  the  interests  of  the 
customers  as  well  as  of  the  house.  In  the  case  of  an 
account  in  prime  standing,  for  example,  it  is  not  neces- 
sary to  give  actual  figures  indicating  how  big  the  ac- 
count is;  nor  is  the  credit  man  justified  in  gossiping 
regarding  delicate  facts  affecting  the  condition  of  his 
customers.  At  all  times,  however,  the  credit  man 
should  give  information  sufficient  to  present  the  true 
condition  in  the  right  light  to  the  interested  inquirer 
and  under  all  circumstances  should  avoid  saying  any- 
thing which  is  expressly  or  impliedly  misleading. 

Briefly,  reviewing  the  duties  of  the  credit  man,  we 
^rtd  that  he  serves  his  house  best  in  the  following 


THE  CREDIT  MAN  87 

ways :  first,  by  reducing  losses  to  a  minimum  through 
wholesome  interest  in  his  accounts;  second,  by  fos- 
tering a  maximum  of  sales  through  proper  co-opera- 
tion with  the  sales  department  and  considerate  treat- 
ment of  customers,  and,  third,  by  contributing  to  the 
proper  regulation  of  credit  in  general  by  true  co-opera- 
tion with  other  credit  men  and  constant  study  of  com- 
mercial and  industrial  conditions. 

PERSONAL   QUALIFICATIONS    OF   THE   CREDIT    MAN 

To  cope  in  a  full  measure  with  the  various  duties 
that  have  been  mentioned,  the  credit  man  must  meas- 
ure up  to  the  following  severe  requirements : 

(i)  He  must  be  a  man  of  sterling  character,  with 
courage  to  deal  squarely  with  weakened  accounts,  and 
the  ability  to  say  "NO"  when  necessary.  His  hon- 
esty must  be  unimpeachable;  thus,  and  thus  only  can 
he  command  the  respect  of  the  customer  as  well  as  of 
all  his  fellow  credit  men. 

(2)  He  must  be  of  analytical  mind — competent  to 
digest  various  kinds  of  information,  to  see  facts  in 
their  proper  proportions,  and  to  separate  the  superficial 
from  the  substantial  in  arriving  at  a  conclusion. 

EDUCATIONAL   QUALIFICATIONS   OF  THE   CREDIT   MAN 

It  is  true  that  some  of  the  most  efficient  credit  men 
of  to-day  acquired  their  knowledge  in  the  hard  school 
of  actual  business  experience.  They  are  prepared  to 
solve  their  problems  by  virtue  of  crystallized  knowl- 
edge obtained  through  years  of  experience.     In  gen- 


88  CREDITS  AND  COLLECTIONS 

eral,  however,  a  credit  man,  to  be  best  equipped  to 
meet  the  complex  problems  of  to-day,  must  supplement 
his  knowledge  gained  in  narrow  daily  routine  by  facts 
acquired  through  diligent  study.  Among  the  most  im- 
portant subjects  with  which  he  should  be  familiar  are 
these : 

( 1 )  Accounting.  A  credit  man  should  be  able  not 
only  to  analyze  satisfactorily  a  financial  statement,  but 
also  when  necessary  to  go  over  the  books  and  financial 
affairs  of  a  customer. 

(2)  Corporation  finance.  With  the  tremendous 
increase  in  the  corporate  method  of  doing  business 
among  small  concerns  as  well  as  big,  the  credit  man 
finds  new  problems  with  which  he  can  cope  only 
through  understanding  the  principles  of  corporation 
finance. 

(3)  Commercial  law.  The  credit  man  must  know 
the  elemicnts  of  the  law  of  contract  and  sales.  He  also 
finds  indispensable  a  practical  knowledge  of  the  bank- 
ruptcy laws  and  the  other  laws  governing  the  rights 
and  duties  of  debtors  and  creditors. 

(4)  Economics.  The  credit  man  should  under- 
stand thoroughly  the  fundamental  organization  of 
business,  the  various  legislative  acts,  such  as  the  Cur- 
rency Bill,  and  the  Tariff  Bill,  and  the  other  economic 
phenomena  that  affect  the  credit  conditions  of  the 
community. 

(5)  Psychology.  The  study  of  this  science  will 
assist  the  credit  man  in  properly  understanding  many 
credit  risks.  In  this  study,  however,  a  credit  man  is 
best  schooled  by  his  actual  daily  experiences. 


THE  CREDIT  MAN  89 

(6)  Banking  practice.  It  is  also  well  for  a  credit 
man  to  have  an  intelligent  understanding  of  banking 
practice,  and  to  be  sufficiently  versed  in  insurance  and 
real  estate  to  grasp  the  sigificance  of  these  factors  in 
relation  to  the  credit  risk. 


CHAPTER  VI 

ELEMENTS  DETERMINING  THE  CREDIT  RISK 

Credit,  as  we  have  observed,  is  a  vital  force  in  the 
promotion  of  trade.  It  is  obvious,  however,  that  the 
purpose  of  increasing  profits  through  the  agency  of 
credit  as  a  trade  builder  will  be  defeated  if  the  losses 
caused  by  poor  credit  judgment  exceed  the  gains  re- 
sulting from  the  increased  business.  The  perplexing 
question,  therefore,  that  is  always  occurring  to  the 
sales  department,  the  credit  department  and  to  the 
merchant  himself,  is :   Is  the  credit  good  ? 

THE    POLICY    OF    THE    HOUSE 

The  all-important  question  of  whom  to  trust  must  in 
practice  be  viewed  by  the  credit  departments  from  dif- 
ferent angles.  In  the  first  place,  in  making  its  decision 
as  to  acceptable  risks,  the  credit  department  must  look 
at  the  problem  from  the  standpoint  of  the  policy  of 
the  house.  The  credit  department  is  not  concerned 
primarily  with  risks  that  are  unquestionably  good  or 
irredeemably  poor;  these  are  relatively  few.  It  is 
rather  the  great  majority  of  intermediary  hazards  with 
which  the  credit  department  has  to  deal.  Amid  this 
large  class  the  locus  of  the  line  of  division  between  ac- 
ceptable and  non-acceptable  risks  depends  largely  upon 

90 


ELEMENTS  DETERMINING  RISK        91 

policy.  In  other  words,  business  enterprises  organ- 
ized on  a  basis  of  large  scale  production,  or  merchants 
engaged  in  keenly  competitive  industries  or  in  the  sale 
of  commodities  yielding  big  profits,  may  find  it  advis- 
able to  adopt  a  very  liberal  credit  policy.  On  the  other 
hand,  manufacturers  possessing  such  monopolistic  ad- 
vantages arising  from  branded  or  copyrighted  goods 
that  dealers  are  more  or  less  compelled  to  buy  from 
them,  or  traders  and  merchants  operating  on  a  small 
margin  of  profit,  are  inclined  to  be  more  exacting  and 
conservative  in  dispensing  credit. 

THE   ATTITQDE   OF   THE   CREDIT   MAN 

Besides  the  policy  of  the  house  as  determined  by  the 
exigencies  of  the  business,  the  decision  of  the  credit 
department  is  further  influenced  by  the  attitude  of 
the  credit  man  himself.  Some  credit  men  pride  them- 
selves upon  the  low  percentage  of  their  losses,  forget- 
ting that  there  may  be  greater  loss  in  profits  because 
of  the  curtailment  in  sales  caused  by  their  credit  meth- 
ods. The  credit  man  who  is  unwilling  to  take  a  fair 
business  risk  is  certain  to  divert  business  from  his 
house,  for,  as  a  rule,  a  customer  "turned  down"  is 
forever  lost.  On  the  other  hand,  the  credit  man,  who 
grants  credit  too  freely,  rolls  up  excessively  large  losses 
for  his  house  and  contributes  to  the  general  business 
demoralization  created  by  the  undue  inflation  of  credit. 
It  is  the  aim  of  every  well  regulated  credit  depart- 
ment to  avoid  these  extremes  of  a  too  free  or  a  too 
narrow  policy.  It  is  true  that  firms  considered  ex- 
cellent risks  sometimes   fail,   and  that  those  looked 


92  CREDITS  AND  COLLECTIONS 

upon  as  being  poor  hazards  sometimes  develop  suc- 
cessfully. The  chances  are  opposed  to  this,  however, 
and  the  factor  of  safety  for  the  management  is  im- 
measurably higher  in  the  middle  course. 

THE   BASIS    OF    CREDIT 

The  controlling  factor  in  granting  credit  is  confi- 
dence. By  confidence  we  mean  the  feeling  of  assur- 
ance as  to  the  debtor's  ability  and  willingness  to  pay 
his  bill  at  maturity.  It  is  based  upon  three  elements 
which  constitute  the  essentials  underlying  the  granting 
of  credit — namely,  character,  capacity  and  capital. 

Character  is  the  essential  of  primary  importance.  It 
is  the  essence  of  the  credit  problem,  for  men  de- 
ficient in  character  cannot  be  trusted.  In  his  remarks 
before  the  Pujo  Investigation  Committee  the  late  J.  P. 
Morgan  said,  "Character  is  the  fundamental  of  bank- 
ing." ^     How  much  more   forcibly  this  principle  ap- 

^  The  following  is  an  extract  from  the  testimony  of  J.  P. 

Morgan  as  reported  in  the  Money  Trust  Investigation,  Vol. 

II,  p.  1084: 

Mr.  Morgan.  I  have  known  a  man  to  come  into  my 
office,  and  I  have  given  him  a  check  for  a 
million  dollars  when  I  knew  he  had  not  a 
cent  in  the  world. 

Mr.  Untermyer.    There  are  not  many  of  them. 

Mr.  Morgan.         Yes,  a  good  many. 

Mr.  Untermyer.    That  is  not  business? 

Mr.  Morgan.  Yes;  unfortunately  it  is.  I  do  not  think  it 
is  good  business,  though. 

Mr.  Untermyer.  Commercial  credits  are  based  upon  the  pos- 
session of  money  or  property. 


ELEMENTS  DETERMINING  RISK        93 

plies  to  mercantile  credit  is  apparent  when  we  realize 
that  the  specific  collateral  frequently  supporting  bank- 
ing loans  is  absent  in  business  transactions.  It  goes 
without  saying  that  the  giving  of  merchandise  without 
any  security  upon  the  promise  that  payment  will  be 
made  at  a  future  date,  should  be  restricted  absolutely 
to  the  trustworthy. 

The  credit  man,  however,  must  not  only  feel  sure 
of  the  character  of  a  prospective  risk,  but  must  also 
possess  a  reasonable  knowledge  as  to  his  ability  to 
make  good  on  his  obligation.  In  other  words,  when 
the  credit  department  is  satisfied  as  to  the  good  moral 
qualities  of  an  applicant  for  credit,  it  must  then  de- 
cide how  much  credit  is  to  be  given.  What  is  the  ap- 
plicant's capacity?  If  he  is  given  too  much  credit,  he 
will  be  in  as  bad  a  predicament,  if  not  worse  than,  the 

Mr.  Morgan.         What? 

Mr.  Untermyer.    Commercial  credits? 

Mr.  Morgan.         Money  or  property  or  character. 

Mr.  Untermyer.  Is  not  commercial  credit  based  primarily 
upon  money  or  property? 

Mr.  Morgan.         No,  sir;  the  first  thing  is  character. 

Mr.  Untermyer.    Before  money  or  property? 

Mr.  Morgan.  Before  money  or  anything  else.  Money 
cannot  buy  it. 

Mr.  Untermyer.  So  that  a  man  with  character,  without  any- 
thing at  all  behind  it,  can  get  all  the  credit 
he  wants,  and  a  man  with  the  property  can- 
not get  it? 

Mr.  Morgan.        That  is  very  often  the  case. 

Mr.  Untermyer.    But  that  is  the  rule  of  business? 

Mr.  Morgan.        That  is  the  rule  of  business,  sir. 


94  CREDITS  AND  COLLECTIONS 

man  who  cannot  obtain  adequate  credit,  for  he  will 
be  tempted  to  over  expand  his  business. 

To  gauge  the  credit  capacity  of  an  applicant,  the 
credit  man  turns  naturally  to  a  study  of  the  third  "C" 
— capital.  The  financial  status  of  credit  applicants  and 
debtors  will  be  more  thoroughly  discussed  later  when 
we  analyze  financial  statements.  Suffice  it  to  say  in 
this  connection,  however,  that  not  only  the  amount  of 
capital  but  also  the  efficiency  with  which  it  is  used 
must  be  considered  by  the  credit  department.  The  data 
necessary  to  secure  this  information  are  usually  found 
in  past  experience.  The  efficiency  of  capital  in  par- 
ticular measures  the  capacity  of  the  applicant,  for  it 
indicates  the  amount  of  careful  consideration  that  he 
has  heretofore  given  to  his  use  of  credit  and  also 
the  extent  of  economy  in  the  organization  and  ad- 
ministration of  his  business. 

To  summarize,  therefore,  we  can  state  the  credit 
equation  as  follows : 

Character  +  Capacity  +  Capital  =  Limit  of  Credit. 

Character  must  exist  in  full  measure  if  any  credit  at 
all  is  to  be  given.  This  question  being  decided,  the 
determination  of  the  limit  of  credit  involves  a  study 
of  the  varying  proportions  in  which  the  other  two  ele- 
ments, capacity  and  capital,  are  present. 

POINTS    TO    BE   INVESTIGATED 

The  points  to  be  investigated  before  credit  is  ex- 
tended may  be  summarized  as  follows : 

First:  Personal  character,  which  includes  (a) 
habits  of  living  and  spending,  with  particular  regard 


ELEMENTS  DETERMINING  RISK        95 

to  the  social  ambitions  of  the  applicant's  wife,  (b) 
tendencies  to  drink  or  gamble  to  excess,  (c)  truth- 
fulness and  respect  for  business  engagements. 

Second :  Business  ability,  which  takes  into  account 
(a)  age  and  experience,  (b)  energy,  aggressiveness, 
common  sense  and  shrewdness,  (c)  ability  to  organize 
and  direct  subordinates,  (d)  technical  knowledge  of 
the  business  itself,  (e)  general  education  and  training 
making  for  broad  mindedness  in  business,  (f)  buying 
and  selling  methods,  (g)  success  in  this  or  other  lines 
of  business,  (h)  location  of  business  with  special  refer- 
ence to  population,  prosperity  of  the  community  and 
present  or  potential  competition. 

Third :  Financial  condition,  under  which  is  consid- 
ered (a)  balance  between  assets  and  liabilities,  and  na- 
ture of  each,  (b)  relation  of  current  assets  to  current 
liabilities  and  turnover  of  stock,  (c)  insurance  carried, 
(d)  method  of  paying  debts,  (e)  proportion  of  capital 
invested  and  borrowed,  considering  also  whether  the 
capital  was  acquired  by  saving,  gift,  inheritance,  spec- 
ulation or  otherwise. 

How  to  obtain  information  on  these  points  will  be 
treated  in  the  following  chapters  on  "Sources  of  In- 
formation." 


CHAPTER  VII 
SOURCES  OF  CREDIT  INFORMATION 

THE  GENERAL  AND  SPECIAL  AGENCIES 

Fundamentally,  credit  granting  is  based  on  knowl- 
edge relating  to  the  character,  capacity  and  capital  of 
the  customer.  Of  the  various  sources  of  obtaining 
such  information,  the  one  best  known  and  most  com- 
monly used  is  the  mercantile  agency.  This  may  be 
defined  as  an  organization  formed  for  the  purpose  of 
ascertaining  the  credit  position  of  persons  engaged  in 
trade  and  of  circulating  this  information  among  its 
members  and  subscribers. 

Mercantile  agencies  are  divided  into  two  classes, 
general  and  special.  The  special  agency  limits  its  field 
of  operation  to  particular  lines,  such  as  jewelry,  mil- 
linery, textiles,  garment  manufacturers,  furniture  and 
carpets,  etc.  Agencies  of  this  character  are,  of  course, 
very  valuable.  On  the  other  hand,  the  general  agencies 
cover  a  vastly  larger  field  and  are  organizations  of 
really  tremendous  magnitude.  They  are  so  universally 
used  and  are  such  potent  forces  in  the  credit  world 
that  it  seems  best  to  devote  this  chapter  entirely  to  a 
discussion  of  their  origin,  organization  and  methods 
of  operation. 

We  have  seen  how  commerce  has  developed  from 

96 


SOURCES  OF  CREDIT  INFORMATION       97 

the  early  stage  when  trading  was  limited  to  an  "ex- 
change of  goods  for  goods"  or  barter,  through  the 
period  when  merchants,  coming  to  market  to  make 
purchases,  brought  their  wallets  in  order  to  make  im- 
mediate payments  in  money,  down  to  the  time  when 
the  growth  of  business  induced  merchants  to  trust 
those  with  whom  they  had  become  personally  ac- 
quainted, by  shipping  goods  to  them  in  exchange  for  a 
promise  to  make  payment  at  a  specified  future  date — 
in  other  words,  on  credit  terms.  The  introduction 
of  the  credit  system  opened  the  minds  of  the  jobbers 
and  manufacturers  to  the  tremendous  opportunities 
for  business  building.  At  a  time  when  travel  was  un- 
certain, communication  very  slow,  and  transportation 
facilities  weak,  the  dealer  who  was  located  at  points 
distant  from  the  market  and  was  dependent  entirely 
upon  his  own  capital,  found  his  field  of  activity 
severely  restricted.  The  wholesalers  in  the  large  cities, 
however,  realized  this,  and  foreseeing  the  possibilities 
for  increased  trading,  they  gradually  extended  the  sys- 
tem of  doing  business  on  credit. 

In  those  days  there  was  very  little  information  ac- 
cessible to  the  merchant  concerning  his  customer's 
character,  ability  and  financial  strength.  The  travel- 
ling salesman  had  not  yet  made  his  appearance,  and 
the  merchant  had  to  depend  on  his  personal  knowledge 
and  such  vague  information  as  he  could  obtain  through 
mail  inquiries.  It  is  quite  obvious  that  the  extension 
of  credit  based  upon  such  uncertain  data  resulted  in 
serious  losses.  Nevertheless,  the  additional  business  it 
stimulated  prompted  the  wholesalers  to  continue  grant- 
ing credit  in  spite  of  the  hazards  involved. 


98  CREDITS  AND  COLLECTIONS 

Thus  matters  continued  until  the  crisis  of  1837, 
when  a  panic  occurred  that  brought  destruction  to 
both  banks  and  merchants  throughout  the  country. 
The  losses  from  bad  debts  were  enormous,  and  mer- 
chants were  brought  to  realize  that  one  of  the  promi- 
nent contributory  causes  of  the  ruinous  conditions  ex- 
isting was  the  poor  credit  system  which  had  made  pos- 
sible overtrading  and  wild-cat  speculation.  The  im- 
mediate effect  of  this  crisis  was  a  recognition  of  the 
necessity  of  closer  investigation  of  credits.  This  re- 
sulted in  the  establishment  of  the  first  mercantile 
agency. 

THE   FIRST    MERCANTILE   AGENCY 

This  was  established  in  1841,  by  Louis  Tappan,  a 
New  York  merchant.  Mr.  Tappan  had  made  it  a  point 
carefully  to  compile  records  relating  to  his  large  mar- 
ket of  customers.  These  records  covered  his  entire 
experience  with  them  and  showed  other  information 
acquired  by  personal  observation  and  through  corre- 
spondence. After  the  panic  he  began  to  sell  this  in- 
formation, and  the  eagerness  of  the  other  merchants 
to  buy  the  records  encouraged  him  to  found  the  first 
business  institution  organized  for  the  exclusive  purpose 
of  gathering  and  selling  credit  information. 

As  to  the  origin  of  the  business  and  the  commercial 
necessities  out  of  which  it  grew,  we  quote  a  journal 
published  at  that  time :  "Immediately  after  the  ter- 
rible mercantile  revulsion  of  1837  (are  you  aware  that 
in  1837  every  chartered  bank  in  the  United  States 
failed?),  when  our  whole  system  of  internal  com- 
merce was  prostrate  and  nearly  all  its  operators  bank- 


SOURCES  OF  CREDIT  INFORMATION       99 

rupt,  this  agency  was  planned  and  put  into  operation 
as  a  remedy  for  some  of  the  difficulties,  that  had  just 
been  so  heavily  experienced.  Its  design  was  to  up- 
hold, extend  and  render  safe  and  profitable  to  all  con- 
cerned the  great  credit  system  on  which  our  country 
had  thrived."  While,  at  the  beginning,  the  agency  re- 
ports were  very  meagre,  the  service  rendered  along 
these  proposed  lines  was  valuable  and  led  to  an  early 
improvement  in  credit  conditions. 

Louis  Tappan  had  associated  with  him  his  brother 
Arthur  Tappan.  In  1846  Benjamin  Doughlass,  who 
had  joined  them  in  1845,  "^vas  admitted  into  partner- 
ship and  assumed  the  chief  management.  In  1849 
Louis  Tappan  retired  and  his  brother  Arthur  took  his 
place,  the  firm  becoming  Tappan  &  Doughlass.  This 
continued  until  1854,  when  Benjamin  Doughlass  be- 
came sole  proprietor.  On  assuming  the  sole  owner- 
ship Mr.  Doughlass  made  his  brother-in-law,  Robert 
Graham  Dun,  a  partner,  the  firm  style  becoming  B. 
Doughlass  &  Co.  In  1857,  the  agency  began  to  pub- 
lish detailed  statistics  regarding  mercantile  failures  in 
the  United  States  and  Canada.  These  statistics  have 
become  the  authoritative  standard  on  this  subject.  In 
1859  Mr.  Doughlass  sold  his  interests  to  his  partner 
and  the  present  firm  of  R.  G.  Dun  &  Co.  was  formed. 

GROWTH    OF   THE   AGENCY 

The  business  after  the  war  grew  from  humble  pro- 
portions until  it  covered  the  United  States  and  Canada, 
and  it  has  gradually  extended  farther.  In  1841  the 
concern  had  one  small  room  with  only  half  a  dozen 


lOO         CREDITS  AND  COLLECTIONS 

clerks  who  laboriously  transcribed  in  longhand  the  re- 
ports sent  to  subscribers. 

To-day  the  organization  has  about  250  branches,  96 
of  which  are  located  in  trade  centers  outside  the  United 
States.  It  employs  a  corps  of  over  10,000  in  its  of- 
fices and  has  over  100,000  representatives  or  corre- 
spondents in  less  important  commercial  centers. 

This  development  did  not  continue  for  long,  how- 
ever, before  a  rival  entered  the  field.  In  1848  John 
M.  Bradstreet,  a  lawyer  living  in  Cincinnati,  Ohio, 
was  made  assignee  of  a  large  insolvent  estate.  While 
thus  engaged  he  acquired  considerable  information 
concerning  the  debtors  as  well  as  the  creditors  of  this 
estate,  and  he  made  arrangements  for  the  selling  of 
this  information  to  a  number  of  New  York  concerns. 
So  successful  were  his  operations  that  in  1849  the 
business  had  expanded  sufficiently  to  warrant  his  open- 
ing an  office  in  New  York,  inaugurating  "Bradstreet's 
Improved  Commercial  Agency."  This  is  the  origin 
of  the  enterprise  that  now  embraces  the  whole  com- 
mercial world  in  its  investigations.  Many  other  mer- 
cantile agencies  entered  the  field  of  furnishing  credit 
information;  each  vied  with  the  other  in  the  length  of 
the  list  of  retailers  on  whom  information  could  be 
had.  This  resulted  in  extremely  long  lists  devoid  of 
any  reliable  information.  Dun  and  Bradstreet  fur- 
nished reliable  lists  and  were  the  only  agencies  to  sur- 
vive the  competition. 

The  establishment  of  these  agencies  was  not  accom- 
plished without  difficulties.  It  can  readily  be  under- 
stood that  the  retail  traders  did  not  encourage  insti- 
tutions  which    they   said   contemplated    "spying"    or 


SOURCES  OF  CREDIT  INFORMATION      loi 

"prying"  into  their  affairs.  Moreover,  some  jobbers 
opposed  the  agencies  because  of  the  supposed  inquisi- 
torial nature  of  their  work.  The  agencies  were  also 
confronted  with  the  question  whether  they  would  be 
subject  to  the  general  rules  of  law  in  respect  to  the 
publication  of  libels.  A  mercantile  agency,  through 
misleading  information,  might  publish  matter  libelous 
and  if  it  were  to  be  deprived  of  all  defence  except 
only  that  of  proof  of  complete  truthfulness,  it  probably 
could  not  be  maintained.  The  courts,  however,  have 
ruled  that  a  communication  made  by  a  mercantile 
agency  in  good  faith  and  without  malice,  to  one  of 
its  subscribers  upon  his  request,  is  made  under  the 
law  of  qualified  privilege.  Hence,  agencies  actuated 
by  worthy  motive  in  the  reports  have  been  given  wide 
latitude  by  the  courts  upon  ground  of  both  principle 
and  public  policy. 

In  spite  of  the  above  mentioned  difficulties,  how- 
ever, the  agencies  developed,  for  they  were  favored 
by  the  conditions  of  the  country.  Traders  were  con- 
tinually appearing  in  newly  settled  districts  and  were 
constantly  migrating  from  point  to  point  experiment- 
ing with  business  conditions.  In  view  of  such  a  lack 
of  business  stability,  these  traders  were  reconciled  to 
giving  information  regarding  their  qualifications  for 
credit  purposes.  The  unsettled  state  which  followed 
the  Civil  War  also  fostered  the  willingness  of  cus- 
tomers to  give  information.  Under  these  conditions  it 
did  not  require  much  time  for  the  agencies  to  justify 
their  existence.  It  has  been  clearly  proved  that  the 
seller  of  goods  is  ready  and  willing  to  give  credit ;  he 
wants  only  to  be  satisfied  regarding  the  buyer's  respon- 


I02         CREDITS  AND  COLLECTIONS 

sibility.  The  buyer  is  glad  of  the  opportunity  to  dem- 
onstrate his  worth  in  order  to  obtain  the  benefits  of 
credit.  The  agency  is  an  efficient  and  effective  servant 
of  both. 

ORGANIZATION    OF   THE   AGENCY 

The  essence  of  the  agency  work  is  readiness  to  serve. 
To  anticipate  inquiry  is  the  true  principle  of  reporting. 
For  this  purpose  the  country  is  divided  into  a  number 
of  large  districts,  comprising  one  or  more  counties. 
In  each  district  there  is  a  central  office  at  which  dis- 
trict information  is  assembled  and  transmitted  to  the 
main  offices.  Outside  of  the  United  States  each  agency 
also  has  a  number  of  branch  offices. 

Travelling  reporters  from  all  branches  are  contin- 
ually covering  their  respective  territories.  The  major- 
ity of  the  merchants  are  called  upon  for  financial  state- 
ments showing  itemized  assets  and  liabilities.  Refer- 
ences are  obtained,  and  these  as  well  as  other  authori- 
ties in  the  trade  are  consulted.  An  effort  is  made  to 
verify  the  figures  given  and  also  to  determine  the  re- 
liability of  the  references. 

In  all  the  smaller  towns  special  correspondents  look 
up  new  merchants  and  send  in  items  affecting  the 
standing  and  responsibility  of  the  existing  merchants. 
In  every  county  seat,  generally  in  the  recorder's  of- 
fice, some  one  is  employed  to  send  in  daily  memoranda 
of  all  suits,  mortgages,  deeds  and  other  instruments 
filed,  which  affect  any  one  in  the  county  who  is  en- 
gaged in  business.  The  country  districts  and  outside 
towns  are  thoroughly  covered,  no  hamlet  or  place  being 
too  remote  to  be  visited. 


SOURCES  OF  CREDIT  INFORMATION      103 

The  greatest  care  is  taken  in  selecting  agents  and 
correspondents.  Nevertheless,  prudence  would  de- 
mand some  check  upon  them.  This  is  done  by  the 
agency  through  travelling  reporters,  who  report  upon 
traders  usually  without  knowledge  of  what  the  local 
agent  had  previously  reported.  A  comparison  of  the 
two  reports  will  bring  to  light  any  discrepancies. 

The  credit  man  must  remember,  however,  that  the 
report  is  seldom  better  than  the  agent  who  makes  it 
and  that  it  is  only  human  to  err.  The  credit  man  will, 
therefore,  profit  by  supplementing  the  agency  informa- 
tion with  the  several  sources  of  credit  information 
hereinafter  described.  Completeness  and  accuracy  of 
information  is  absolutely  essential. 

In  the  cities  the  work  is  done  by  reporters  who  have 
had  considerable  experience  in  the  office.  These  men 
must  be  just,  conscientious,  and  capable  of  judging 
human  nature.  They  must  also  possess  such  a  person- 
ality as  will  induce  business  men  to  impart  confi- 
dential information  to  them.  These  reporters  become 
experts  along  certain  lines.  For  instance,  there  are 
reporters  of  dry  goods,  boots  and  shoes,  leather,  steel 
and  iron.  There  are  also  men  posted  on  conditions 
in  the  financial  district,  who  circulate  constantly  among 
merchants  and  bankers  and  who  frequently  get  the 
sense  of  something  wrong  before  it  definitely  ap- 
pears on  the  surface. 

When  a  subscriber  to  an  agency  makes  an  inquiry, 
his  subscription  number  is  put  opposite  the  name  and 
for  three  years  from  the  date  of  the  inquiry  the  agency 
voluntarily  advises  him  of  important  changes  such  as 
news  of  bankruptcy,   assignments,   foreclosures,   law 


I04         CREDITS  AND  COLLECTIONS 

suits,  suspicious  transfers,  pledging  of  accounts  re- 
ceivable, mortgages,  fires  and  serious  losses  of  every 
kind  affecting  the  person  inquired  about.  The  record- 
ing of  these  names  also  gives  the  agency  a  list  to 
be  visited  by  the  reporters,  when  a  revised  investiga- 
tion is  deemed  advisable. 


CONTENT    OF    AGENCY    REPORT 

The  agency  report  is  intended  to  cover  the  following 
points : 

1.  Antecedents  or  past  record. 

This  includes  usually  the  date  when  the  business 
was  started;  the  composition  of  the  firm,  if  a  corpo- 
ration, the  names  of  the  officers  and  directors,  and  if 
a  partnership  the  names  of  the  partners;  age  and 
other  information  about  the  proprietors  or  officers. 

2.  Summary  of  totals  of  assets  and  liabilities  of 
previous  statements. 

These  totals,  when  given,  are  taken  from  annual  or 
other  periodical  statements  previously  furnished  by  the 
merchant  to  the  agency. 

3.  Full  details  of  latest  statements. 

This  statement  is  usually  one  made  by  the  mer- 
chant. The  agency  tries  whenever  possible  to  obtain 
a  statement  over  the  signature  of  the  merchant.  The 
advantage  of  obtaining  signed  statements  will  appear 
later. 

4.  Comments  regarding  figures  contained  in  state- 
ments. 

These  comments  are  made  by  the  employees  of  the 
agency. 


SOURCES  OF  CREDIT  INFORMATION      105 

5.  Character,  habits,  and  business  capacity. 
Under  this  head  a  brief  history  of  the  business  is 

usually  given  in  narrative  style.  The  importance  of 
this  information  is  that  it  may  enable  the  credit  grantor 
to  discover  traces  of  dishonesty  where  it  exists. 

6.  Comments  regarding  store,  location,  business 
outlook,  etc. 

The  reporter  of  the  agency  gives  his  opinion  on 
these  points,  and,  of  course,  his  opinion  should  be  sub- 
stantiated by  other  information  by  the  credit  grantor. 

7.  Credit  standing, — itemized  trade  opinions  and 
experiences  of  other  creditors. 

Here  we  find  the  opinions  of  houses  dealing  with  the 
merchant  in  question.  These  comments  deal  with  the 
debtor's  manner  of  meeting  his  business  obligations. 
The  names  of  the  houses  are  not  given,  and  the  credit 
man  should  bear  in  mind  that  different  houses  have 
entirely  different  standards  of  judging  a  debtor.  With- 
out the  name  of  the  house  giving  the  opinion,  the 
credit  man  is  at  a  loss  to  know  what  standard  has  been 
adopted  as  the  basis  of  the  opinion. 

RATINGS 

Another  function  of  the  agency  is  to  give  ratings. 
These  consist  of  two  elements,  capital  and  credit.  The 
accompanying  schedules  indicate  the  rating  symbols 
used  by  the  agencies. 

The  ratings  are  condensed  conclusions,  first,  denot- 
ing capital  and  indicating  the  estimated  net  worth  after 
verification  and  allowances  for  shrinkage,  etc. ;  and 
second,  denoting  grade  of  credit  and  intending  to  re- 


io6         CREDITS  AND  COLLECTIONS 

R.  G.  DUN  &  CO.  RATINGS 


Estimated  Pecuniary  Strength 


General  Credit 


High 


Good 


Fair 


Ltd. 


AA 

A+ 

A 

B+ 

B 

C+ 

C 

D+ 

D 

E 

F 

G 

H 

J 

K 

L 

M 


Over  $1,000,000. 

Over  $750,000. . . 

$500,000  to 

300,000  to 

200,000  to 

125,000  to 

75,000  to 

50,000  to 

35,000  to 

20,000  to 

10,000  to 

5,000  to 
3,000  to 
2,000  to 
1,000  to 
500  to 


$750,000. 

500,000 . 
300,000 . 
200,000 . 
125,000. 

75,000. 

50,000 . 

35,000. 

20,000 . 


10,000 

5.000 

3,000 

2,000 

1 ,000 

less  than  500 

Where  only  a  Credit  Rating  appears 
this  line  of  Credit  designation  applies 


A  I 
A  I 
A  I 
I 
I 
I 

2 

2^ 


I 

1 

2 

2 
2 

2^ 

3 
3 
3 
3 
3 


1X2 

2 

2 
2 

2^^ 
2^ 
2^ 

3 

3^ 


3J^ 
3^ 
3 14 


s'A 


2 
2 
2 
2^ 

23^ 

2j^ 

3 
3 
3 

33^ 

4 

4 

4 

4 

4 

4 

4 


fleet  the  past  record,  ability,  and  business  prospects. 
Thus,  if  the  agency  concludes  that  the  estimated  wealth 
is  from  $35,000  to  $50,000,  and  credit  grade  second, 
it  would  be  shown  as  follows :  Dun  Agency,  D2 ; 
Bradstreet,  R — C.  These  ratings  are  compiled  in  books 
issued  by  the  agencies  quarterly  to  the  subscribers. 
That  published  January,  19 16,  contained  nearly  1,900,- 
000  names.  The  book  is  arranged  alphabetically  by 
states,  cities  and  smaller  corporate  divisions,  while 
the  names  of  the  merchants  in  any  city  are  arranged 
alphabetically  under  that  city.     For  the  convenience 


SOURCES  OF  CREDIT  INFORMATION      107 

BRADSTREET  RATINGS 


Estimated  Wealth 


Grades  of  Credit 


G    $1 
H 

J 

K 

L 

M 
N 
O 
P 

Q 

R 

S 

T 

U 

V 

W 

X 

Y 

Z 


000,000 

500,000 

400,000 

300,000 

250,000 

200,000 

150,000 

100,000 

75,000 

50,000 

35>ooo 

20,000 

10,000 

5,000 

3,000 

2,000 

1,000 

500 

o 


and 

to$ 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

to 

ta 


aoove . . . 

1,000,000. 

500,000 . 

400,000. 

300,000. 

250,000. 

200,000. 

150,000. 

100,000. 

75,000. 

50,000 . 

35,000. 

20,000. 

10,000. 

5,000. 

3,000. 

2,000. 

1,000. 

500. 


Aa 

A 

Aa 

A 

A 

B 

A 

B 

A 

B 

A 

B 

A 

B 

B 

C 

B 

C 

B 

C 

B 

C 

C 

D 

C 

D 

C 
D 

D 

E 

D 

E 

D 

E 
F 

E 

E 

F 

of  travelling  salesmen  and  others  the  agencies  publish 
the  rating  books  in  state  editions  of  smaller  size. 
These  editions  can  be  had  only  by  those  who  are  sub- 
scribers to  the  large  books. 


THE   USE    OF   RATINGS 

The  ratings  are  intended  to  serve  merely  as  an  in- 
dex to  the  contents  of  the  reports  and  the  cautious 
credit  man  is  seldom  guided  by  ratings  when  consider- 
ing a  risk  of  any  fair  amount.  He  wants  to  know 
all  the  details  and  to  reach  his  own  conclusion,  which 
may  be  entirely  different  from  the  opinion  of  the  edi- 


io8         CREDITS  AND  COLLECTIONS 

tor  of  the  books.  Besides,  he  realizes  that  the  ratings 
in  the  books  are  subject  to  considerable  revision. 
There  are  about  300,000  changes  every  month.  In 
other  words,  the  rating  was  perhaps  correct  when  the 
book  was  printed,  but  misleading  to-day.  It  is  inter- 
esting to  note,  however,  that  in  a  recent  year,  out  of 
14,047  failures,  13,187  or  93%  had  nominal  or  no 
credit  ratings,  766  were  rated  good,  and  only  94  were 
rated  very  good  or  highest. 

Ratings  are  sometimes  useful,  however,  in  passing 
upon  small  rush  orders,  and  a  poor  rating  or  an  un- 
favorable change  in  rating  cautions  the  credit  man  to 
investigate  carefully.  They  are  also  serviceable  in 
making  periodical  revisions  of  one's  credit  files.  A 
change  in  ratings  suggests  to  the  credit  man  that  a 
new  investigation  concerning  his  customer  should  be 
made.  The  rating  books  are  also  frequently  employed 
in  compiling  lists  of  prospective  customers,  for  it  is 
better  not  to  solicit  an  account  that  will  have  to  be 
turned  down.  Furthermore,  the  rating,  if  poor,  is  a 
signal  to  the  sales  department  to  avoid  the  account. 

THE   FUNCTION    OF   THE   AGENCY 

The  issuance  of  reports  and  the  publishing  of  the 
rating  books  constitute  the  function  of  the  large  mer- 
cantile agencies.  Errors  incidental  to  all  human  ef- 
forts must  necessarily  creep  into  a  system  of  such 
immense  scope.  Yet,  when  we  compare  the  chaotic 
state  of  affairs  which  preceded  the  introduction  of  the 
mercantile  agencies,  with  the  splendid  credit  condi- 
tions of  to-day,  we  can  appreciate  the  valuable  service 


SOURCES  OF  CREDIT  INFORMATION      109 

that  the  agencies  are  rendering.  It  is  largely  the  ac- 
tivities of  the  agencies  that  have  kept  clear  the  chan- 
nels through  which  trade,  wonderfully  stimulated  by 
credit,  is  continually  flowing. 

The  speed  and  accuracy  of  the  agency  service  could 
probably  be  improved  with  the  credit  man's  co-opera- 
tion. Thus,  when  making  an  inquiry  of  the  agency, 
the  credit  man  should  give  the  proper  official  style  of 
the  firm  name  and  the  street  address,  so  that  the 
agency  correspondent  may  have  little  difficulty  in  lo- 
cating credit  seekers. 

In  addition  to  furnishing  ratings  and  reports,  the 
agencies  now  publish  weekly  magazines  of  trade  and 
finance  which  are  recognized  authorities  on  national 
business  conditions.  The  summary  of  business  condi- 
tions which  they  give  is  based  on  reports  regularly 
received  from  correspondents  throughout  the  United 
States. 

Considered  in  its  broadest  aspects,  the  function  of 
the  agency  is  to  keep  pace  with  progress  in  all  matters 
relating  to  credit  granting.  As  the  pioneers  of  civiliza- 
tion have  pushed  forward  into  hitherto  unknown  parts 
of  the  world,  the  commercial  agency  has  followed 
and  has  furnished  credit  grantors  with  information 
concerning  people  throughout  the  entire  civilized  world 
who  seek  credit. 

TYPICAL   REPORTS 

Two  actual  reports  (with  the  names  changed)  sub- 
mitted by  the  large  agencies  are  given  herewith.  These 
reports  were  selected  largely  because  of  the  complete- 


no         CREDITS  AND  COLLECTIONS 

ness  of  information  given.  Many  other  reports  are 
not  nearly  so  thorough  or  understandable.  Following 
the  agency  report  is  a  "model  agency  report"  sub- 
mitted by  the  Davenport  Association  of  Credit  Men 
in  a  contest  conducted  by  the  National  Association  of 
Credit  Men  in  1915. 

Please  note  if  NAME,  BUSINESS  and  ADDRESS 
correspond  with  your  inquiry. 

Smith  DRY  GOODS  CO. 

RETAIL  Newark,  Ohio. 

100  Main  St. 
Jos.  Smith,  Pres. 
Percy  E.  Smith,  Vice-Pres. 
Thos.  Jones,  Sec. 
Arthur  J.  Smith,  Treas. 

July  13,  1916 

Record 

This  company  was  incorporated  under  the  general 
laws  of  the  State  of  Ohio  with  an  authorized  capital 
stock  of  $70,000  divided  into  shares  of  par  value  $100 
each.  The  business  was  originally  established  here 
some  years  ago  by  Jos.  Smith,  Sr.,  but  about  5  years 
ago  disposed  of  the  business  to  his  sons,  Percy  E.  & 
Arthur  J.  Smith,  who  gave  their  notes  for  the  greater 
portion  of  the  purchase  price.  The  above  company 
was  subsequently  incorporated  and  the  above  officers 
elected.  The  business  has  all  along  been  operated  with 
fair  success,  and  under  capable  management.  The  in- 
terested parties  are  well  spoken  of  in  all  respects,  are 
industrious  and  give  their  business  close  attention. 


SOURCES  OF  CREDIT  INFORMATION      in 


Statements 

The    following-  comparative  statements  have  been 
received  from  them : 


Dates 
Dec.  191 1 
Apr.  1913 
May  1914 
Dec.  1914 
Dec.   1915 


Assets 

$82,738.94 
73,818.02 
69,283.60 
60,270.66 
43,304-80 


Liabilities 

$37,477-86 
22,445.85 
40,465.97 

41,495-56 
29,995.11 


Surplus 
$45,261.08 

51,372-17 
28,817.63 
18,777.66 
24,336-15 


Under  the  signature  of  P.  E.  Smith  the  following 
signed  statement  is  now  received  purporting  to  be  from 
inventory  of  May  31,  1916: 


Quick  Assets 

Cash $      654.40 

Bills  receivable   40.1 1 

Accounts  receivable   5,001.65 

Merchandise   38,494.17 


-$44,190.33 


Liabilities 

Commercial  &  Savings  Bank. .  .$  2,500.00 
Manufacturers  National  Bank..    10,400.00 

Mrs.  Smith 5,000.00 

Others   10,407.40 

Working  capital $15,882.73 


$28,307.40 


112         CREDITS  AND  COLLECTIONS 

Miscellaneous  Assets 

Furniture $  7,923.86 

Percy  Smith   2,192.53 

Doubtful  Accounts    817.33 

$10,933.72 

Net  worth , .$26,816.45 

(Signed)     Smith  Dry  Goods  Co. 
Per  P.  E.  Smith. 


General  Information 

They  have  reduced  their  operating  expense  to  a 
minimum  and  by  careful  and  conservative  manage- 
ment have  succeeded  into  working  their  affairs  into 
a  better  shape.  A  comparison  of  the  statement  De- 
cember 31,  1914,  with  statement  of  May  31,  1916, 
would  indicate  a  decrease  in  quick  assets  of  approxi- 
mately $2,600.  Their  indebtedness  has  since  been  re- 
duced from  $41,493.56  to  $28,307.40.  That  working 
capital  having  been  increased  during  that  period  from 
$7,309.16  to  $15,882.73.  A  comparison  of  their  state- 
ment show  a  steady  gain  and  improvement  in  their 
affairs  since  191 4.  They  claim  in  a  communication  in 
connection  with  the  statement  that  merchandise  in- 
vestment is  an  estimated  figure  based  on  percentage  of 
cost.  While  the  bank  indebtedness  has  not  during  the 
past  2  years  been  reduced  according  to  their  statement 
their  merchandise  indebtedness  has  been  reduced  by 
$12,000.  But  it  is  learned  that  since  May  31,  1916, 
they  have  wiped  out  the  indebtedness  of  the  Commer- 
cial &  Savings  Bank.  The  statement  as  submitted 
is  identical  with  one  furnished  to  local  bank  and  be- 
lieved conservative.  They  have  a  very  fair  investment 
of  stock  on  hand  and  have  something  in  accounts  re- 


SOURCES  OF  CREDIT  INFORMATION      113 

ceivable.  Their  store  is  equipped  with  modern  and 
up-to-date  fixtures.  While  they  no  doubt  represent  a 
fair  equity  in  the  business  in  view  of  their  heavy  in- 
debtedness to  banks  and  otherwise,  it  is  not  deemed 
practical  to  assign  a  capital  rating. 

The  company  is  at  this  time  said  to  be  doing  a  large 
and  increasing  business,  which  is  under  very  capable 
management,  and  with  the  improving  business  condi- 
tions locally  their  future  prospects  are  favorably  com- 
mented upon. 

Trade  Opinions 

The  company  have  all  along  been  quoted  meeting 
obligations  in  a  prompt  manner.  An  investigation 
made  among  ten  houses  in  August,  191 5,  all  quote  the 
account  as  prompt.  The  following  is  the  result  of 
a  trade  investigation  made  at  this  time. 

1.  Have  been  selling  this  account  for  a  number  of 
years,  extending  credit  up  to  $1,000  on  regular  term; 
discounts  are  availed  of  and  now  has  only  current  pur- 
chases not  due. 

2.  Have  sold  for  the  past  five  years  on  regular 
terms;  highest  credit  $1,000  is  now  owing  but  not  due, 
bills  are  discounted. 

3.  Have  sold  for  several  years,  purchases  ranging 
from  $500  to  $700,  and  bills  usually  discounted  or 
met  at  maturity. 

4.  Have  sold  for  the  past  three  years,  highest  credit 
$450;  70  day  terms,  and  accounts  are  availed  of,  owes 
nothing  at  the  present  time. 

5.  Have  been  selling  for  several  years,  highest 
credit  $200  regular  terms,  and  bills  are  usually  dis- 
counted or  met  at  maturity.  Owes  current  purchases 
not  due. 

6.  Opened  account  in  Spring  1916  extending  credit 


114         CREDITS  AND  COLLECTIONS 

up  to  $50  2%  10-30  day  terms,  no  balance  at  present 
time.  Other  houses  consulted  report  having  no  credit 
experience  with  the  account. 

7.  Sold  recently  highest  credit  $490;  regular  terms, 
owing  nothing  at  present. 

8.  Very  small  bill  discount. 

9.  We  are  not  selling. 

10.  Have  sold  for  years,  highest  credit  $280  terms 
70  days;  payments  have  been  made  promptly;  nothing 
owing. 

11.  Have  had  this  account  several  years,  previous 
to  this  highest  credit  $70  regular  terms,  discount  in 
10  days,  nothing  owing. 

12.  Have  had  this  account  for  i  year.  Highest 
credit  $70  goods  sold  on  6-10-60  bills  discounted,  owes 
nothing  at  present,  account  considered  satisfactory. 

13.  Sold  this  account  for  years,  highest  credit  $175, 
goods  sold  on  7-10-60  bills  discounted,  owes  $15  not 
yet  due,  account  satisfactory. 

14.  Have  had  one  transaction,  highest  credit  $205, 
sold  on  60  days  bills  discounted ;  owes  nothing  at 
present,  account  satisfactory. 

15.  Sold  this  account  since  1913,  highest  credit 
$290.  Goods  sold  on  2%  10-60  paid  at  maturity. 
Nothing  owing  at  present,  regard  account  satisfactory, 
account  is  limited  to  $300. 

16.  Refuse  to  sell  at  present  except  on  a  cash  basis. 
17- 


one 


Acct.  H.  C. 

Terms 

Owing 

Remarks 

Old     $300 

2-10-60 

$300 

Prompt 

300 

2-10-60 

100 

(( 

"         300 

2-10-60 

0 

« 

400 

2-10-60 

200 

Prompt      to 
week  over 

100 

70  days 

0 

Prompt 

SOURCES  OF  CREDIT  INFORMATION      115 


Old 

$600 

70  days 

0 

Prompt 

900 

70  days 

500 

400 

7-10-60 

15 

200 

7-10-60 

0 

150 

2-10-60 

0 

200 

60  days 

100 

75 

Regular 

40 

Prompt  prior  to 
their  difficulties. 
Sold  them  up  to 
$400 

New 

50 

30  days 

0 

Discount  sold 
since  Feb.    1914 

Old 

25 

10  &  30  days 

0 

Discount  and 
prompt 

« 

250 

Regular 

0 

Prompt,  have  not 
sold  this  year 

(( 

500 

70  days 

0 

Prompt 

17.  Received  small  order,  but  did  not  ship. 

18.  Old  account  sell  in  a  moderate  wdij  on  regular 
terms,  payments  prompt.  Three  report  no  transac- 
tions, v^ithin  the  past  year,  thirty  others  consulted 
claim,  no  experience. 

NO  FIRE  RECORD. 
N.  Y.  12-5-1916.     CR 

-  -  to  -3 


BROWN  AND  TRACY 
JOB,  COTTON  AND  WOOLEN  GOODS 
N.  Y.  CITY 
Abraham  Brown 
Jacob  Tracy 

Jan.  20,  1908. — 117  Eldridge  St. 
The  partners   are   both   married   men   aged   about 
forty-two   years,    and    have   been   in   business    under 


ii6         CREDITS  AND  COLLECTIONS 

above  style  since  August  i,  1900,  they  having  origi- 
nally been  located  at  70  Eldridge  St.,  afterwards  re- 
moving to  71  Eldridge  St.,  and  returned  to  first  writ- 
ten address  May  i,  1906. 

Since  having  been  in  business  they  made  statements 
which  are  summarized  as  follows : 

Date  Assets  Liabilities  Surplus 

Aug.  I,   1 901  $  7,600.00  $      800.00  $  6,800.00 

Jan.  1902  10,070.00  1,500.00  8,570.00 

Aug.  1902  15,000.00  2,500.00  12,500.00 

Dec.  1902  17,700.00  3,700.00  14,000.00 

June  1903  24,500.00  7,500.00  17,000.00 

Dec.  1903  27,500.00  7,500.00  20,000.00 

Aug.  15,   1904  33,000.00  7,000.00  26,000.00 

Dec.  1904  40,000.00  10,000.00  30,000.00 

July  I,   1905  51,000.00  16,000.00  35,000.00 

Jan.  8,   1906  68,000.00  18,000.00  58,000.00 

Feb.  16,   1906  68,526.75  18,104.50  50,422.25 

Aug.  12,  1906  64,875.03  15,125.50  4974973 

Dec.  15,  1906  75.356.49  24,135.55  51,220.94 

Under  date  of  the  nth  instant  and  as  taken  from 
inventory  of  December  28,  1907,  the  following  state- 
ment signed  by  Jacob  Tracy  has  been  submitted : 

Assets 

Merchandise  on  hand,  cost $38,415.40 

Outstanding  accounts,  new 31,250.55 

Machinery  and  fixtures 975.00 

Cash  on  hand 820.00 

Cash  in  bank. 5,696.43 

Total  available  assets $77,157-38 


SOURCES  OF  CREDIT  INFORMATION      117 

Liabilities 

For  merchandise  on  hand $16,312.30 

Loans  from  bank 11,212.55 

27,524.95 


Surplus  in  business $49,632.43 

Real  Estate 

70  Eldridge  St.    (Firm  Name) 

valued    $22,000.00 

Mortgaged 17,000.00 

Equity    5,000.00 

Total  worth  in  and  out  of  business $54,632.43 

Keep  a  set  of  books;  do  not  borrow  on  accounts  re- 
ceivable; never  had  a  fire.  Insurance  on  stock, 
$28,500;  annual  rent,  $1,500;  annual  business  amounts 
to  $261,000. 

The  present  figures  compared  with  those  of  Decem- 
ber, 1906,  showed  that  they  have  not  much  more  than 
held  their  own.  The  account  is  known  to  prominent 
houses  several  of  whom  were  interviewed  recently 
report  selling  them  on  10-60,  amounts  running  around 
$1,000  or  so  and  their  obligations  have  been  promptly 
met.  H.  A.  K. 

(E  2/2) 


ii8         CREDITS  AND  COLLECTIONS 

BROWN  AND  TRACY 
JOB,  COTTON  AND  WOOLEN  CDS. 

N.  Y.  City 
Aug.  3,  1908. — 117  Eldridge  St. 
Those  consulted  are  of  the  opinion  that  this  firm 
have  not  much  more  than  held  its  own  since  the  early- 
part  of  the  year. 

The  account  has  long  been  known  to  prominent 
houses  who  have  been  selling  it  right  along  on  ten 
sixty  basis  amounts  running  up  to  a  couple  of  thou- 
sand dollars  or  so  in  some  quarters  and  payments 
among  those  consulted  are  reported  satisfactory. 
(E  2>^)  H.  A.  K. 

Sept.  2d,  1908 

MODEL   AGENCY    REPORT 

Brown,  Wm.  T. 

GROCERY 

Davenport,  Iowa, 
Scott  County, 
123  New  Street. 

7/15/14, 

Wm.  T.  Brown,  26,  Single. 

( 1 )  Antecedents 

Mr.  Brown  began  work  at  the  age  of  19  for  N.  G. 
Smith  and  clerked  in  his  grocery  store  for  seven  years. 
This  is  his  first  experience  in  business. 

(2)  Statement 

Under  date  of  July  15,  he  gave  our  representative 
the  following  signed  statement  as  showing  his  financial 
condition  at  this  time : 


SOURCES  OF  CREDIT  INFORMATION      119 

Assets : 

Stock  on  hand $1,700.00 

Store  furniture  and  fixtures.  .  . .       400.00 

Cash  on  hand  and  in  bank 200.00 

Accts.  receivable   600.00 

Total  Assets $2,900.00 

Liabilities: 

Mdse,  open  account  not  due. . .  $300.00 

No  other  indebtedness. 

Insurance  on  stock $  1,400.00 

Monthly  store  rent 35-00 

Monthly  wag'es  paid 125.00 

Annual  Sales 18,000.00 

No  liability  as  bondsman  or  endorser. 

(3)  List  of  IVholesalcrs 

Buys  from  the  following : 

Halligan  Cofifee  Company,  Davenport,  Iowa. 
J.  F.  Kelly  Company,  Davenport,  Iowa. 
Morton  L.  Marks  Company,  Davenport,  Iowa. 
Van  Patten  Sons  Company,  Davenport,  Iowa. 
Smith  Brothers  &  Burdick,  Davenport,  Iowa. 
G.  S.  Johnson  &  Company,  Davenport,  Iowa. 

(4)  Bank 

Banks  with  the  Home  Savings  Bank. 

Signed  by 
Wm.  T.  Brown. 

(5)  Investigation 

Mr.  Brown  is  a  young  man  of  good  business  ability 
and  of  the  best  of  habits  and  character.    He  claims  to 


120         CREDITS  AND  COLLECTIONS 

have  saved  the  money  with  which  he  went  in  business 
from  his  salary.  His  store  is  fairly  well  located  and 
is  kept  in  good  condition.  Mr.  Brown,  with  his  sister, 
does  all  the  work.  He  is  stretching  his  capital  some- 
what in  order  to  carry  the  stock  necessary,  and  this  at 
times  makes  him  a  few  days  slow  in  paying  his  bills. 
The  account  is  well  thought  of  among  the  wholesale 
trade  and,  as  a  rule,  the  bills  are  met  when  due.  The 
general  opinion  is  that  the  statement  as  given  is  about 
right.  He  is  said  to  be  a  hard  worker  and  pays  close 
attention  to  the  business. 


(6)  Trade  Experience 

No.   I.     We   have   sold    him   ever   since   he   started. 

Highest  credit  $40.00.     He  owes  nothing 

at  this  time.     Pays  in  30  days. 
No.  2.     We  have  sold  him  since  last  fall.     Highest 

credit    $92.00.      He    owes    at    this    time 

$82.00,  of  which  $60.00  is  just  due.     He 

usually  pays  in  30  days,  but  has  run  a  few 

days  past  due  a  few  times. 
No.  3.     We  sell  him  quite  a  few  goods  on  30  and  60 

days'  terms.     His  highest  credit  $200.00. 

He  owes  at  this  time  $100.00  not  yet  due. 

He  pays  us  when  due.     The  account  is 

satisfactory. 
No.  4.     His  highest  credit  with  us  is  $65.00.     He 

owes  at  this  time  $36.00.     He  does  not 

discount,  but  pays  when  due.     Our  terms 

are  60  days  net. 

(7)  Fire  Record 

Never  burned  out  or  suffered  loss  by  fire. 


SOUECES  OF  CREDIT  INFORMATION      121 


(8)  Rating  Assigned 


(Whatever  symbols  are  used 
.  .by  the  Agency  reporting.) 


Accompanying  the  report  is  the  following  explana- 
tion: 

Attached  is  what  we  consider  a  model  mercantile 
report. 

The  first  requisite  of  a  statement  is  legibility  and 
accuracy,  including  the  absence  of  typographical  er- 
rors. The  various  headings  should  appear  in  the  or- 
der of  their  importance. 

No.  I. — The  first  is  Character,  Habits  and  Antece- 
dents. A  man's  financial  statement  may  be  satisfac- 
tory, but  if  his  character  is  unreliable  and  his  habits  are 
not  good  and  his  former  record  is  not  clean,  he  can 
hardly  be  considered  a  good  credit  risk. 

No.  2. — The  next  in  importance  is  the  Signed 
Financial  Statement  showing  a  complete  list  of  assets 
and  liabilities,  subdivided,  of  course,  according  to  the 
nature  of  the  business  the  party  under  investigation 
is  engaged  in.  A  corporation,  manufacturing  concern 
or  a  large  firm  should  necessarily  show  greater  detail 
in  its  financial  statement  than  a  small  retail  dealer. 
The  nature  of  the  detail  will  of  course  depend  upon 
the  particular  business.  The  report  should  state 
whether  or  not  the  statement  was  actually  signed  by 
the  party  and  should  in  all  cases  include  insurance 
carried  on  store  building  if  owned  by  the  dealer  and 
on  stock,  also  the  monthly  store  rent  when  the  store 


122         CREDITS  AND  COLLECTIONS 

building  is  not  owned,  monthly  wages  and  salaries, 
annual  sales  and  also  liability  as  endorser  or  bonds- 
man. If  a  dealer  carries  too  small  an  amount  of  in- 
surance in  proportion  to  his  stock  of  merchandise  he 
is  either  placing  the  valuation  on  his  stock  too  high 
or  he  is  not  careful  to  safeguard  his  business  by  carry- 
ing adequate  protection.  If  his  monthly  store  rent  is 
too  high  and  his  monthly  expenses  for  wages  are  too 
high  for  the  amount  of  business  done,  that  would  be 
a  danger-signal  suggesting  care  in  extending  credit. 
Liability  as  a  bondsman  or  endorser  is  a  very  important 
point  and  its  bearing  on  the  advisability  of  extend- 
ing or  restricting  credit  can  only  be  determined  by 
specially  investigating  each  individual  case. 

No.  3. — The  next  in  order  should  be  a  list  of  the 
dealers  from  whom  the  party  under  investigation  is 
purchasing  his  merchandise  because,  having  a  list  of 
those,  further  investigation  can  be  made  by  a  mem- 
ber using  an  inquiry  blank  of  the  National  Associa- 
tion of  Credit  Men,  which  sometimes  discloses  some 
of  the  most  valuable  information  regarding  the  credit 
risk. 

No.  4. — The  next  in  order  should  be  the  bank  with 
whom  the  party  under  investigation  does  business,  al- 
though the  information  imparted  by  a  bank  as  a  rule 
is  not  as  definite  nor  as  valuable  as  that  obtained  from 
merchandise  creditors. 

It  is  important  that  the  statement  be  signed  because 
it  will  only  be  a  few  years  until  every  state  will  have 
<-he  uniform  false  statement  law. 

No.  5. — Next  in  order  we  would  place  investigation 


SOURCES  OF  CREDIT  INFORMATION      123 

of  verification  of  the  statement  made  by  the  party  un- 
der investigation  and  information  of  a  general  char- 
acter as  to  the  condition  of  stock,  location  and  the 
opinions  of  various  authorities  consulted. 

No.  6. — Trade  reports  from  as  many  sources  and  as 
explicitly  as  possible. 

No.  7. — Fire  record. 

No.  8. — Rating  assigned. 

(Whatever  symbols  are  used 
...... . . . . ... .,. by  the  Agency  reporting.) 


SPECIAL  AGENCIES 

Constantly  improving,  the  effective  services  rendered 
by  the  large  mercantile  agencies  induced  the  free  im- 
parting of  knowledge  pertaining  to  credit.  This  ex- 
change of  confidences  contributed,  as  we  have  seen,  to 
the  elevation  of  commerce  to  a  higher  plane,  supplant- 
ing, for  the  petty  jealousies,  a  friendly,  though  vigor- 
ous rivalry  among  merchants.  It  was  not  a  small 
factor  in  the  progress  towards  enlightened  co-opera- 
tion. 

The  general  agency  to-day  involves  a  very  heavy 
investment  and  is  so  organized  that  there  is  practi- 
cally no  limit  to  its  activities,  which  extend  almost 
over  the  entire  civilized  w^orld.  However,  in  the  very 
vastness  of  this  wonderful  machine  are  to  be  found 
its  w^eaknesses. 

Organized  to  cope  with  work  on  a  large  scale,  the 
engine  is  not  built  for  speed.     It  is  the  aim  of  the 


124         CREDITS  AND  COLLECTIONS 

agency  to  anticipate  inquiries,  and  they  do  have  reports 
concerning  most  debtors  on  file.  These  obviously  can- 
not be  had  in  all  cases.  Furthermore,  credit  men  are 
continually  wanting  special  information  regarding 
newly  created  conditions.  The  big  agencies  cannot  fur- 
nish such  reports  without  delay,  nor  are  they  organized 
to  report  up-to-the-minute  detailed  ledger  facts.  The 
large  agencies  cannot  revise  their  reports  very  often 
for  two  reasons;  first,  on  account  of  the  expense  in- 
volved, for  it  must  be  borne  in  mind  that  the  profits 
of  the  large  agency  come  from  the  sale  of  one  report 
several  times,  and,  second,  because  it  would  be  unwise 
for  the  agency  to  pry  into  a  merchant's  affairs  too 
often,  unless  there  were  some  serious  development, 
for  to  do  so  would  arouse  the  antagonism  of  mer- 
chants generally. 

Taking  advantage  of  these  conditions,  smaller  agen- 
cies have  come  into  the  field,  organized  to  render 
special  services.  Usually  the  feature  of  their  reports 
is  the  citing  of  a  number  of  ledger  facts;  and  many 
credit  men  believe  that  no  more  valuable  information 
is  obtainable  than  that  contained  in  the  ledgers 
of  the  merchant's  creditors.  Lacking  the  equipment 
of  the  larger  agency,  the  special  agency  is  more 
restricted  in  its  scope,  but  by  specializing  on  a  few  lines 
of  industry,  and  by  operating  over  more  limited  terri- 
tory, it  is  in  a  position  to  give  very  useful  information. 

The  special  agency  usually  does  not  visit  the  mer- 
chant to  be  reported  upon,  but  obtains  the  major  part 
of  its  information  from  credit  men  of  houses  dealing 
with  the  merchant.     Statements,  when  given  in  the 


SOURCES  OF  CREDIT  INFORMATION      125 

special  agency's  report,  are  generally  obtained  from 
the  merchant  by  correspondence,  unless  the  merchant 
is  located  in  the  city  in  which  the  agency  operates. 

Special  agencies  have  usually  been  established  and 
promoted  by  men  who  have  had  previous  experience 
either  with  the  older  agencies  or  as  credit  managers. 
These  agencies  vary  in  magnitude  from  the  individ- 
ual, who  makes  personal  investigations  at  so  much  per 
report,  to  companies  organized  on  a  fairly  large  scale. 
They  are  prepared  to  make  immediate  investigations, 
visiting  banks,  as  well  as  wholesalers  and  manufac- 
turers, to  ascertain  their  experiences  and  views  con- 
cerning the  subject  of  the  inquiry.  Thus  we  find  re- 
porters of  these  agencies  circulating  among  merchants 
who  cater  to  buyers  of  boots  and  shoes,  millinery, 
notions,  woolens  and  worsteds,  dry  goods,  etc.  The 
investigator  works  among  the  same  credit  men  daily 
and  becomes  a  specialist  in  his  particular  line.  He 
knows  from  experience  where  the  applicant  for  credit 
is  likely  to  be  known.  Primarily  the  special  agency 
reporter  is  interested  in  the  ledger  information,  al- 
though very  often  he  obtains  valuable  facts  relative 
to  the  record  or  general  standing  of  the  debtor. 

Some  of  these  special  agencies,  by  giving  the  sources 
of  the  information,  afford  the  credit  man  the  oppor- 
tunity of  distinguishing  between  the  opinions  expressed 
by  the  conservative  and  the  more  liberal  credit  gran- 
tors. Aloreover,  this  kind  of  a  report  enables  the 
credit  man  to  make  further  direct  inquiries  at  the 
houses  whose  names  are  mentioned  in  the  report.  Of 
course,  the  special  agencies  which  disclose  this  infor- 


126         CREDITS  AND  COLLECTIONS 

mation  must  discriminate  carefully  in  selecting  clients, 
for  the  information  furnished  is  of  a  highly  confiden- 
tial character. 


SPECIMEN  REPORT  OF  SPECIAL  AGENCY 

Report  on  Brown  and  Tracy  {Job.  Cotton  and  Woolen 

Goods) 

William  Eaton,  Cotton  House.  We  have  sold  some 
time,  account  gets  up  to  $1,500  on  ten  sixty,  and  they 
are  prompt. 

John  Ebbetts,  Commission  House.  We  have  been 
selling  some  time,  account  gets  up  to  $1,000  on  ten 
sixty,  and  they  have  been  prompt  to  a  few  days  over; 
account  is  satisfactory  to  us. 

E.  Hunt,  Specialty  House.  We  have  sold  some 
time,  account  getting  up  to  $500.  On  ten  sixty  and 
they  run  a  little  over,  but  this  is  satisfactory  to  us. 

P.  Miller,  Lace  Goods.  We  have  sold  some  time, 
account  getting  up  to  $300  on  ten  sixty,  and  they  run 
about  thirty  days  over. 

J.  Woodside,  Cottons.  We  have  been  selling  some 
time,  account  getting  up  to  $1,000  on  ten  sixty,  and 
they  are  prompt. 

J.  Luce,  Cottons,  We  have  been  selling  some  time, 
and  the  account  is  very  satisfactory  to  us,  getting  up 
to  $1,200  at  a  time  on  ten  thirty,  and  all  bills  have 
been  paid  promptly. 

Quick  Bros.,  Commission  House.  We  never  cared 
to  sell. 

A.  Samson,  Commission  House.  We  have  sold 
some  time;  in  the  past  the  account  has  been  up  to 


SOURCES  OF  CREDIT  INFORMATION      127 

$1,000,  but  of  late  not  over  $200  on  ten  sixty,  and 
they  have  been  paying  us  on  statement. 

L.  Todd,  Cotton  Goods.  We  have  been  selling  some 
time,  account  getting  up  to  $400  on  ten  sixty,  and  they 
run  a  week  over. 


CHAPTER  VIII 
SOURCES  OF  INFORMATION  (Continued) 

THE    CREDIT    EXCHANGE   BUREAU 

The  interchange  of  ledger  experience  by  credit  men 
has  stimulated  a  sincere  co-operative  spirit  among 
merchants.  Sellers  generally  rely  to  a  very  large  de- 
gree upon  the  experiences  of  other  merchants  when 
determining  whether  or  not  to  grant  credit  to  any 
applicant.  They  are  justified  in  so  doing,  for  the 
judgment  of  a  merchant's  creditors  as  to  his  credit 
worth  is  usually  a  most  satisfactory  criterion  of  his 
true  standing. 

To  facilitate  the  exchange  of  credit  information 
among  credit  grantors,  credit  exchange  bureaus  have 
been  organized.  These  bureaus  have  been  established 
by  a  number  of  the  local  credit  men's  associations  and, 
in  the  larger  cities,  by  various  trade  associations. 

TWO   SYSTEMS 

The  methods  employed  by  these  bureaus  vary  to  a 
great  degree.  In  general,  however,  they  may  be 
divided  into  two  distinct  groups.  The  members  of  the 
credit  bureau  send  their  inquiries  to  a  central  office 
established  by  the  bureau  and  usually  under  the  super- 

128 


SOURCES  OF  INFORMATION  129 

vision  of  a  salaried  secretary.  Upon  receipt  of  the 
inquiry  the  bureaus  operating  under  one  plan  will 
investigate  the  subject  of  the  inquiry  among  the 
houses  known  to  have  had  dealings  with  him,  while 
the  bureaus  operating  under  a  second  plan  will  merely 
give  the  inquiring  member  the  names  of  these  houses 
so  that  the  member  may  investigate  and  obtain  the 
information  directly  from  those  houses. 

The  operation  of  the  latter  class  of  credit  exchange 
bureaus  may  be  described  briefly  as  follows:  Each 
member  is  first  given  a  distinctive  number,  for  ex- 
ample, Jones  Manufacturing  Co.  is  given  number  i. 
Smith  Wholesale  Co.,  number  2,  Walters  Jobbing 
Company,  number  3,  and  so  on.  A  list  of  the  members 
with  their  distinctive  numbers  is  printed  and  distrib- 
uted to  all  members,  so  that  each  may  know  the  identi- 
fying number  of  each  of  the  others.  Each  member 
then  sends  to  the  central  ofiice  a  list  of  all  of  his  cus- 
tomers. A  card  is  then  made  out  for  each  customer 
and  on  this  card  is  put  the  numbers  of  all  members 
having  dealings  with  the  customer;  for  example,  if 
Richard  Roe,  a  retailer,  were  a  customer  of  both  the 
Jones  Manufacturing  Company  and  the  Walters  Job- 
bing Company,  Roe's  card  would  bear  the  numbers 
I  and  3. 

When  a  member  desires  to  make  a  credit  inquiry 
concerning  a  new  customer,  the  member  communi- 
cates with  the  central  office,  either  by  telephone  or  by 
sending  the  inquiry  on  a  blank  furnished  for  the  pur- 
pose. The  central  office,  after  consulting  the  custom- 
er's card,  advises  the  member  of  the  numbers  of  all 
members  having  dealings  with  the  subject  of  the  in- 


I30         CREDITS  AND  COLLECTIONS 

quiry.  At  the  same  time,  the  central  office  adds  the 
number  of  the  inquiring  member  to  the  customer's 
card,  so  that  the  file  is  kept  up  to  date. 

Upon  receiving  the  information  above,  the  inquiring 
member,  by  consulting  his  key  list,  ascertains  the 
names  of  the  houses,  and  has  his  credit  department 
investigator  visit  these  houses.  The  investigator  then 
obtains  the  information  desired  by  the  credit  depart- 
ment. What  information  he  seeks  is  discussed  in  a 
succeeding  chapter.  Instead  of  sending  around  an 
investigator,  the  credit  man  sometimes  uses  the  tele- 
phone. 

A    COMPLETE   REPORT    SYSTEM 

The  second  class  of  credit  exchange  bureaus  con- 
ducts its  operations  somewhat  similarly  to  the  one 
above  described.  It  differs,  however,  in  that  it  goes 
a  step  further  and  furnishes  written  reports  instead 
of  merely  giving  the  names  of  members  of  the  houses 
having  business  dealings  with  the  subject  of  the  in- 
quiry. Like  the  bureau  first  described,  each  member 
is  given  a  number,  the  names. are  listed,  and  each 
member  furnishes  a  list  of  his  customers.  When  a 
member  desires  to  make  an  inquiry  on  a  new  customer, 
he  uses  a  blank  supplied  by  the  bureau.  These  inquiry 
blanks  are  sent  to  the  central  office,  which  assembles 
them  and,  under  one  system,  makes  up  for  each  mem- 
ber a  special  list  containing  the  names  of  his  custom- 
ers about  whom  inquiries  have  been  made  that  day. 
The  member  then  indicates  by  symbol  or  otherwise 
his  experience  with  the  customers.  Under  another 
system,  the  central  office  lists  all  customers,  who  were 


SOURCES  OF  INFORMATION  131 


THE  Wholesale  Shoe  League 


DATE SUBSCRIBER'S  NO. 


Please  fill  out  information  blanks  on  following  if 
interested,  ever  interested  or  declined.  Draw  a  line 
through  unanswered  names. 

NAME  ADDRESS 


List  of  Subjects  of  Inquiry,  copy  of  which  is  sent  to  all  members. 

the  subject  of  inquiry  that  morning,  on  a  special  sheet. 
A  copy  of  this  sheet  is  then  sent  to  each  member,  who 
comments  on  his  experiences  with  those  of  his  cus- 
tomers on  the  list. 


INFORMATION    EXCHANGED   BY    MEMBERS 

The  information  called  for  on  these  sheets  or  on 
separate  information  blanks  includes,  usually,  the  fol- 
lowing : 

(a)  Amount  owing.  That  is,  the  amount  the  cus- 
tomer owes  to  the  member.  This  is  important  for  it 
is  a  sign  of  the  extent  to  which  other  houses  are 
giving  the  customer  credit.  It  also  enables  the  credit 
man  partially  to  check  up  the  item  "accounts  payable" 


132         CREDITS  AND  COLLECTIONS 

in    his    customer's    statement.      It    further    indicates 
whether  or  not  the  customer  is  overbuying. 

(b)  Amount  overdue.  This,  together  with  (c), 
points  out  the  manner  in  which  the  customer  meets  his 
obhgations  and  is  an  indication  of  the  customer's  pres- 
ent condition. 

(c)  Manner  of  payment.  The  credit  man  is  in- 
tensely interested  in  the  manner  in  which  a  new  credit 
appHcant  pays  his  debts  elsewhere,  for  the  credit  man 
does  not  care  to  take  on  accounts  which  are  "slow 
pay"  and  difficult  to  collect.  The  credit  man  is  also 
interested  in  knowing  how  his  customers  are  paying 
other  creditors,  for  this  information  is  quite  impor- 
tant when  granting  additional  credit  or  when  collecting 
the  account. 

(d)  Last  order.  This  information  assists  the  credit 
man  in  determining  the  value  of  the  items  above,  for 
if  the  house  giving  the  information  has  had  no  recent 
dealings  with  the  customer,  its  opinion  must  be  dis- 
counted. 

(e)  Remarks.  This  gives  the  member  an  oppor- 
tunity to  put  any  special  information  on  the  sheet. 

CLEARING   THE   INFORMATION 

After  the  sheets  are  filled  out  by  the  members  they 
are  returned,  usually  by  messenger,  to  the  central 
office,  which  "clears"  the  information  contained  on  the 
sheets.  That  is,  the  different  information  on  a  single 
customer  is  compiled  in  a  report,  which  is  then  sent 
to  the  member  making  the  inquiry  or,  in  some  cases, 
to  every  member  of  the  bureau. 


SOURCES  OF  INFORMATION  133' 

THE  WHOLESALE  SHOE  LEAGUE, 

127  DUANE  STREET,  NEW  YORK,  N.  Y. 

Telephone,  Worth  1348 


INFORMATION  BLANK 

Member's  No N.  Y., _  191. 

Name 

Address 

I     If  new  account, 

amount  of  first  order 


2  How  long  sold 

3  Highest  credit 

4  Now  owes 

5  Past  due 

6  How  pays 

7  Is  account  secured 

8  Are  unfilled  orders 
larger  than  usual 

9  Date  of  last  payment 

10  Amount  of  last  payment.. 

1 1  Sell  for  cash , 

Remarks 


Please  have  answer  blanks  ready  for  messenger  at  12  o'clock, 
otherwise  information  desired  cannot  be  furnished  on  the  same  day. 

N.  B. — If  information  on  question  No.  8  is  particularly  desired, 
state  so  on  inquiry  blank,  otherwise  it  will  remain  unanswered. 


134         CREDITS  AND  COLLECTIONS 

OTHER  INFORMATION  DESIRABLE 

Some  credit  interchange  bureaus  make  a  point  of 
ascertaining,  in  addition  to  the  information  above, 
the  amount  of  new  credit  a  customer  is  seeking  among 
its  members.  This  is  extremely  important,  for  when- 
ever a  merchant  sets  out  to  defraud  his  creditors  he 
will  usually  establish  himself  in  the  confidence  of  a 
few  of  his  creditors  and  then  attempt  to  buy  as  freely 
as  sellers  will  permit.  This  he  accomplishes  either 
by  opening  a  number  of  new  purchasing  accounts  or  by 
extending  his  credit  line  with  his  old  creditors.  The 
information  gathered  by  a  credit  exchange  bureau, 
that  a  customer  is  opening  a  number  of  new  accounts, 
is  a  danger  signal  to  the  credit  man. 

OBJECTIONS   TO    CREDIT   EXCHANGE   BUREAUS 

One  of  the  possible  dangers  of  using  the  credit  ex- 
change bureau  system,  where  complete  reports  are 
rendered  by  the  bureau,  is  that  members  might  be  in- 
duced to  substitute  the  service  of  the  bureau  for  per- 
sonal interchange  between  members.  On  this  point 
we  quote  from  the  191 5  report  of  the  Committee  on 
Credit  Co-operation  of  the  National  Association  of 
Credit  Men : 

"Your  committee  wishes  to  utter  a  word  of  warn- 
ing against  a  tendency  that  has  appeared  to  substitute 
the  service  of  credit  interchange  bureaus  for  direct 
interchange  between  members  of  the  Association.  The 
real  purpose  for  which  credit  interchange  bureaus  are 
organized  and  operated — that  is,  economy  and  com- 


SOURCES  OF  INFORMATION 


135 


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136         CREDITS  AND  COLLECTIONS 

pleteness  in  clearances — was  not  intended  as  a  substi- 
tute for  the  direct  and  personal  relation  between  mem- 
bers of  the  Association  in  credit  experience  inter- 
change, and  rather  than  detract  or  diminish  this  direct 
relationship,  what  the  bureaus  have  done  and  can  ac- 
complish, should  more  deeply  suggest  and  defend  the 
direct  and  personal  interchange.  In  brief,  the  credit 
interchange  bureaus  are  intended  as  a  supplement,  not 
a  substitute,  for  the  direct  interchange." 

Under  the  system  first  described  no  such  danger 
exists. 

It  is  obvious,  too,  that  the  value  of  the  reports  fur- 
nished by  the  credit  interchange  bureau  depends  to  a 
large  degree  upon  the  number  of  its  members.  To 
reach  its  maximum  efficiency  the  bureau  should  in- 
clude in  its  membership  all  of  the  possible  creditors  of 
a  single  customer,  for  only  in  this  way  can  the  credit 
man  know  of  the  experiences  of  a  customer  with  all 
his  creditors.  This  state  of  efficiency  has  seldom,  if 
ever,  been  reached,  although  it  is  the  goal  to  which 
credit  bureaus  constantly  strive.  However,  the  far- 
ther separated  from  this  ideal  bureau  the  actual  bureau 
is,  the  less  valuable  its  reports  become. 

On  the  other  hand,  many  credit  men  object  to  be- 
longing to  credit  exchange  bureaus,  because  it  im- 
poses on  them  the  obligation  of  answering  every  in- 
quiry made  concerning  their  customers.  This,  many 
credit  men  believe,  is  frequently  unfair  for  the  reason 
that  they  may  be  compelled  to  answer  several  times 
as  many  inquiries  as  they  make.  Then,  too,  some 
credit  men  fear  they  may  be  required,  at  times,  to 
answer  an  inquiry  upon  a  customer  whose  condition 


SOURCES  OF  INFORMATION  137 

may  be  temporarily  strained,  and  whose  account  needs 
very  delicate  treatment.  By  disclosing  the  customer's 
predicament,  those  credit  men  are  of  the  opinion  that 
the  condition  of  the  customer  may  be  so  weakened 
as  to  wreck  him  with  a  resulting  loss  to  all  creditors. 
In  answer  to  this  objection,  there  is  no  obligation  on 
the  part  of  members  to  disclose  their  customer's  posi- 
tion indiscriminately  to  all  members,  and  it  is  quite  pos- 
sible judiciously  to  give  the  information  called  for  to 
those  members  making  the  inquiry  without  the  bad 
results  pictured.  On  the  contrary  true  interchange  re- 
lations should  inspire  action  in  concert  to  tide  the 
weakened  debtor  over  his  difficulties  and  thus  serve  the 
best  interests  of  all  concerned. 


THE   CREDIT   CLEARING   HOUSE 

Practically  all  of  these  bureaus  are  local  in  nature. 
Recently,  however,  a  movement  has  been  started  to 
establish  a  national  credit  interchange  bureau  under 
the  jurisdiction  of  the  National  Association  of  Credit 
Men.^  At  the  present  time  the  Credit  Clearing  House 
is,  as  far  as  the  writer  knows,  the  only  institution 
which  attempts  to  clear  information  on  a  national 
basis. 

In  1888,  the  Credit  Clearing  House  undertook  to 
act  as  a  center  for  the  assembling  of  ledger  informa- 
tion and  at  this  time  (1916)  its  information  covers 
500,000  retail  merchants. 

Each  member  of  the  Credit  Clearing  House  regis- 

^  See  Credit  Men's  Bulletin,  July,  1916,  p.  524. 


138         CREDITS  AND  COLLECTIONS 

ters  the  names  of  his  customers,  and  contributes  in- 
formation whenever  his  customers  are  under  consid- 
eration. In  each  case  where  his  customers  are  con- 
cerned, he  receives  a  copy  of  the  information  con- 
tributed by  the  other  interested  members. 

The  ledger  facts  relating  to  merchants  are  gath- 
ered from  practically  every  important  wholesale  mar- 
ket in  the  country.  Retail  merchants  are  given  an 
opportunity  to  submit  their  statements,  so  that  the 
statement  may  be  added  to  the  report.  Thorough  in- 
vestigation has  shown  that  the  paramount  factor  in 
such  a  report  is  the  manner  of  payment,  and  so  a  con- 
venient index  to  the  manner  of  payment  has  been 
arrived  at  by  using  percentages. 

If  25  houses  report,  and  10  say  that  payments  are 
slow,  a  note  at  the  foot  of  the  report  reads  as  follows: 

Mar  1916      25  Payment  Experiences      40%  slow. 

If  earlier  reports  have  been  cleared,  the  earlier  per- 
centages are  given.  They  reflect  the  tenor  of  the  ear- 
lier reports,  and  show  whether  the  merchant  is  doing 
better  or  worse.  A  typical  example  is  that  of  a  New 
York  merchant  who  failed  in  July  of  19 15.  In  his  case 
the  percentages  were : 

Feb    191 3  18  Payment  Experiences  22%  Slow 

Jan    1914  20         "  "  35%  Slow 

Jan    1915  15         "  "-  53%  Slow 

Mar  191 5  19         "  "  79%  Slow 

The  next  important  factor  in  such  an  exchange  of 
information  is  its  automatic  disclosure  of  any  attempt 
to  buy  more  merchandise  than  usual,  or  to  shift  lia- 


SOURCES  OF  INFORMATION  139 

bilities  to  a  new  set  of  creditors.  For  convenience, 
the  term  "New  Credit"  is  used  in  this  connection  and, 
if  a  merchant  is  seeking  new  credit  to  an  extent  that 
deserves  notice,  the  percentage  plan  furnishes  an  addi- 
tional remark  at  the  foot  of  the  report. 

A  typical  case  is  that  of  a  concern  which  failed  in 
September,  191 5 : 

Mar  19 1 4      5  Payment  Experiences    40%  Slow 
Sep    1914      7         "  "  50^0  Slow 

Feb   1915      8         "  "  78%  Slow 

May  191 5      7        "  "  86%  Slow 

New  Credit  asked  from  53% 
of  the  houses  reporting 

The  percentages  should  be  accepted  as  a  weather 
vane,  that  shows  which  way  the  wind  blows  but  does 
not  measure  its  violence.  When  the  percentage  is  dis- 
tinctly favorable,  the  credit  man  need  not  go  further; 
when  it  is  not  distinctly  favorable,  he  should  examine 
the  report  itself. 

When  demands  for  new  credit  on  the  part  of  retail 
merchants  are  unusual,  it  is  the  custom  of  the  Credit 
Clearing  House  to  call  special  attention  to  them  by 
issuing  a  notice  to  its  members  which  suggests  that 
the  report  should  be  consulted  before  credit  is  allowed. 
At  the  same  time  the  merchant  is  given  an  oppor- 
tunity to  explain  the  reason  for  placing  so  many  new 
orders,  and  the  explanation,  if  pertinent,  goes  out  with 
the  notice.  These  notices  have  peculiar  value.  More 
than  one  thousand  of  them  have  been  issued  in  the 
last  five  yearS:  and  it  appears  that  more  than  60%  of 
the  merchants  in  question  ultimately  fail. 


I40         CREDITS  AND  COLLECTIONS 

FEATURES  OF  THE  REPORT 

In  a  general  way,  we  may  summarize  the  features 
of  the  report  of  the  Credit  Clearing  House  as  follows : 

The  report  sets  out  an  impartial  array  of  ledger 
facts  and  automatically  brings  to  light  favorable  or 
unfavorable  changes  in  the  merchant's  condition. 

It  sometimes  gives  timely  warning  of  approaching 
failure. 

The  references  are  not  chosen  by  the  debtor. 

The  contents  of  the  report  are  not  disclosed  to  the 
debtor. 

No  member's  name  is  disclosed  even  to  another 
member  without  express  permission. 

The  members  specifically  agree  to  substantiate  each 
item  if  called  upon  to  do  so. 

The  membership  embraces  more  than  thirty  lines  of 
trade  and  covers  the  manufacturing  section  of  the 
country  fairly  well. 

A   TYPICAL   CREDIT   CLEARING    HOUSE  REPORT 
Smith  &  Bros.  June  22,  1915  Somewhere  So.  Carolina 

Cincinnati  District 

H'st.  Cr.  Order  Owing  Due 
$        $  $  $ 

C       736        o      736      400    slow  pays  by  notes;   $336  due 

June;      terms      dating; 

sold  1913  to  1914. 

Baltimore  District 

C      1350    906     1200    1200    slow  very    sold  sev.  seasons. 
E     '       o         e         o    refused       ^263  Apr.  1915. 


SOURCES  OF  INFORMATION  141 

New  York  District 

E  o    no         o         o    first  order     for     shipment     at 

once. 
C  O    634  o  o    first  order    for   shipment    Fall 

1915- 
C       136        000    slow  70        days  ;  sold  1913  to  date. 
J  o    400  O  o    first  order  for  shipment  Aug. 

20. 
days  and  pays ;  on  acct. ; 
dd     162    181      113      113    slow  60  Sep.;       sold      Sept., 

191 2,  to  date. 

Philadelphia  District 

E         24        o  o  o    slow  30        days ;     pays     dfts.     when 

made  ;  terms  90  &  60  x  ; 
sold  yrs.  to  date. 

C  0    320  o  o    first  order     for     shipment     at 

once. 

C      1000        o      325      325     slow  on     acct.     and     pays     by 

notes ;  Collecting  by 
Att'y ;  due  Sept., 
1914;  terms  reg. ;  sold 
Spg.  1913  to  Spg. 
1914. 

Southeastern  District 

E         96        O        96        39    slow  Collecting       by        Att'y; 

terms  reg. ;  due  Apr.  to 
Aug. ;  sold  since  Oct.  9, 
1914. 

E  New  York  District  Coll.  by  Draft  $125  Nov.  14. 

Comparing  the  reports  in  our  file,  we  find  the  manner  of  pay- 
ment as  follows : 

May        1913          9  Payment  Experiences  22>%  slow 

Dec.       1913         14          "                    "  50%  slow 

Aug.       1914        12          "                   "  58%  slow 

Feb.       191S          9          "                   "  100%  slow 

June       1915          8          "                   "  100%  slow 
New  Credit  asked  from  42%  of  the  houses  reporting. 
Notice  to  inquire  issued. 
Sept.  1915.     Bankruptcy. 


142         CREDITS  AND  COLLECTIONS 

DIRECT   INTERCHANGE   OF    LEDGER    EXPERIENCE 

Ledger  information  relating  to  customers  is  fre- 
quently exchanged  between  creditors  without  the  inter- 
vention of  a  credit  bureau  of  any  kind.  This  is  accom- 
plished through  the  agency  of  a  credit  department  in- 
vestigator (see  page  146,  post)  or  by  correspondence. 
The  question  first  to  arise  is,  How  does  one  creditor  or 
prospective  creditor  ascertain  who  the  other  creditors 
of  his  customer  are?  This  he  does  by  asking  the 
customer  for  references,  that  is  the  names  of  other 
creditors.  The  references  furnished  by  the  customer 
himself  are  apt  to  be  valueless  from  the  credit  man's 
viewpoint,  for  the  customer  will  select  only  those  ref- 
erences who  will  speak  well  of  him.  As  w^e  shall  see 
later,  the  credit  man  can  obtain  the  names  of  other 
references  through  the  offices  of  the  traveling  sales- 
man. Then,  too,  where  the  credit  man  is  a  member  of 
the  credit  exchange  bureau  first  described,  the  obtain- 
ing of  supplementary  references  is  a  simple  matter. 
Moreover  the  character  of  the  customer's  business 
usually  suggests  to  the  credit  man  names  of  other  sell- 
ing houses  to  whom  the  debtor  is  probably  known. 

FORMS  USED  FOR  DIRECT  INTERCHANGE 

To  facilitate  the  direct  interchange  of  ledger  ex- 
perience, the  National  Association  of  Credit  Men  has 
adopted  the  special  form  found  on  the  following  page. 

Attached  to  the  form  given  on  the  following  page 
is  a  duplicate  sheet  containing  the  same  matter  as  that 
found  on  the  form  given,  except  for  the  words,  "Re- 


SOURCES  OF  INFORMATION  143 

RETURN  THIS  TO  US 

New  York,  N.  Y 191 

Kindly  give  us  below  YOUR  EXPERIENCE  with 
Name ^ 


P.  0. 


ALL  INFORMATION  WILL  BE  CONSIDERED  STRICTLY  CONFIDENTIAL 


Yours  truly, 


APPROVED  AND  ADOPTED  BY 
NATIONAL  ASSOCIATION  OF  CREDIT  MEN 


RICHMAN  &  CO. 

Members  National  Association 
of  Credit  Men 


To.. 


Sold  Since 

Manner  of  Payment 

Terms 

Discounts 

Highest  Recent  Credit  $ 

Prompt  and  satisfactory 
Slow  hut  considered  good 

f  On  Open  Account,  $ 

Owing  Now  \ 

\  On  Notes,    .    .    .    $ . 

Slow  and  unsatisfactory 

[  On  Open  Account,  $ 

Past  Due      \ 

On  Notes,    ...    $..  . 

Pays  C.  0.  D. 
Sell  for  cash  only 
Account  secured 

First  Order,  $ 

Other  Information' 

Notes  secured 

Account  closed  for  cause 
Makes  unjust  claims 
Collected  by  attorney 

Form  Used  For  Direct  Interchange 


144         CREDITS  AND  COLLECTIONS 

turn  this  to  us.  Kindly  give  us  Your  Experience"  are 
substituted  the  words,  "Retain  this  for  your  files.  We 
give  you  below  Our  Experience."  This  sheet  is  filled 
out  by  the  inquiring  house,  in  compliance  with  rule  4 
given  below.  This  rule  and  a  number  of  others  have 
been  adopted  by  the  National  Association  of  Credit 
Men  to  prevent  abuse  of  the  system  and  to  encourage 
reciprocity  in  the  exchange  of  information.  These 
rules  ^  are  printed  on  the  back  of  the  forms  and  are  as 
follows : 

1.  The  blank  approved  and  adopted  by  the  Na- 

tional Association  of  Credit  Men  for  the 
making  of  inquiries  shall  be  used. 

2.  The  blank  shall  always  indicate  the  nature  of 

the  business  in  which  the  subject  of  inquir}' 
is  engaged. 

3.  Each  inquiry  shall  state  the  amount  of  the  or- 

der which  leads  to  making  the  inquiry  and 
in  addition  indicate  if  it  is  a  first  order. 

4.  If  the  inquirer  has  had  previous  experience  with 

the  one  inquired  on,  then  the  inquiry  shall 
be  accompanied  by  a  statement  of  such  ex- 
perience, thus  encouraging  that  reciprocal  in- 
terchange of  experience  without  which  the 
inquiry  becomes  unfair. 

5.  Inquiries  are  not  to  be  made  except  on  orders 

actually  in  hand  or  on  open  account.  If  in- 
vestigation  is   being  made  with   a  view  to 

^  Rules   to    Govern   the   Interchange   of   Credit   Experience 

Between  Members, 
As  revised  to  meet  certain  evils  in  the  exchange  of  credit 
information  emphasized  by  the  Credit  Cooperation  Committee 
at  the  convention  of  the  Association,  June,  1914. 


SOURCES  OF  INFORMATION  145 

soliciting  business  or  collecting  an  account,  a 
letter  explicitly  stating  this  fact  shall  accom- 
pany the  inquiry. 

6.  Inquiries  shall  only  be  made  through  properly 

constituted  credit  departments ;  inquiries  by 
salesmen  shall  not  be  permitted. 

7.  It  is  essential  that  there  shall  be  no  promiscuous 

inquiries  sent  out  with  the  idea  of  determin- 
ing what  concerns  have  had  experience  with 
the  subject  of  inquiry,  for  promiscuous  in- 
quiries may  do  harm  to  the  customer  and  im- 
pose unnecessary  burdens  upon  credit  depart- 
ments. 

8.  All  inquiries  are  to  be  answered  on  the  day  re- 

ceived and  by  the  credit  man  or  manager  if 
possible,  so  that  not  only  ledger  experience 
may  be  supplied,  but  any  additional  valuable 
information  in  the  possession  of  the  in- 
formant. 

CONCLUSION 

A  compliance  with  these  rules  in  making  inquiries 
will  bring  about  genuine  interchange  of  credit  informa- 
tion and  lead  to  accuracy,  reciprocation,  promptness 
and  confidence.  Their  observance  will  mean  a  closer 
contact  between  the  members  of  the  National  Associa- 
tion of  Credit  Men  and  be  of  great  assistance  in  their 
credit  investigations. 

These  forms  or  modifications  of  them  are  quite  gen- 
erally used  in  the  interchange  of  ledger  information. 
Where,  however,  the  inquiry  is  of  an  unusual  kind  it 
will  be  found  better  to  write  a  letter  stating  exactly 
what  information  is  desired. 


146        CREDITS  AND  COLLECTIONS 

THE  CREDIT  DEPARTMENT  INVESTIGATOR 

Encouraged  by  the  success  of  the  system  of  free 
interchange  of  credit  information,  a  number  of  houses, 
especially  the  larger  ones,  make  it  a  practice  of  obtain- 
ing the  credit  experiences  and  opinions  of  other  cred- 
itors through  personal  investigations  made  by  a  mem- 
ber of  the  credit  department.  This  investigator  visits 
those  mercantile  houses  and  banks  to  whom  he  thinks 
the-  applicant  for  credit  may  be  known.  When  it  is 
thought  desirable,  the  investigator  even  calls  upon 
rival  competitive  concerns. 

Necessarily  the  investigator  confines  his  inquiries  to 
local  concerns  and  banks.  He  usually  carries  with 
him  a  list  of  those  credit  seekers  he  desires  to  inves- 
tigate during  the  day.  He  goes  over  the  list  with  the 
credit  man  at  each  concern  visited,  ascertains  which 
accounts  are  known  and  seeks  to  obtain  the  follow- 
ing information: 

(i)   How  long  the  account  is  known. 

(2)  The  highest  amount  of  credit  extended  to  it. 

(3)  The  present  indebtedness. 

(4)  Manner  of  payments. 

(5)  Present  status  of  the  account. 

(6)  Opinion  of  the  creditor  as  to  the  quality  of  the 
account. 

While  the  above  is  the  ground  usually  covered  by 
the  special  agencies  and  credit  exchange  bureaus,  this 
direct  method  of  obtaining  information  has  many  im- 
portant advantages.  Foremost  among  these  advan- 
tages is  the  quick  action  this  investigation  induces. 
The  value  of  celerity  in  getting  information  is  ap- 


SOURCES  OF  INFORMATION  147 

parent  to  the  credit  man  who  has  found  by  experience 
that  delays  in  passing  upon  the  credit  while  waiting 
for  agency  reports  sometimes  cause  the  cancellation 
of  an  order  which,  on  the  basis  of  reports  subse- 
quently obtained,  could  safely  have  been  approved. 

In  the  second  place,  the  oral  investigation  brings 
the  information  up  to  date.  This  enables  the  credit 
man  in  considering  the  case  of  a  doubtful  account  to 
ascertain  how  current  payments  are  being  made  else- 
where, as  well  as  the  consensus  of  other  creditors' 
opinions  at  that  particular  time.  And  this  is  espe- 
cially important,  for  waning  confidence  aggravates  a 
doubtful  risk.  In  the  third  place,  a  superior  quality 
of  information  is  often  so  obtained.  For  example,  in- 
formation which  discretion  would  forbid  communi- 
cating to  agencies  for  general  circulation  is  often  given 
verbally  to  a  personal  representative  of  the  credit  man 
of  a  reputable  house. 

OBJECTIONS  TO  ORAL  INVESTIGATIONS 

This  system  of  oral  investigations,  which  usually 
produces  more  prompt,  fresh  and  valuable  m forma- 
tion, is  not  without  its  abuses.  For  instance,  multi- 
plicity of  investigations,  particularly  when  the  finan- 
cial condition  of  the  subject  of  the  inquiries  is  not  too 
strong,  may  cause  an  undue  disturbance  in  the  minds 
of  those  credit  men  receiving  the  inquiries,  and  this 
is  quite  likely  to  entail  injurious  consequences  to  the 
debtor.  Moreover  the  busy  credit  man,  without  appre- 
ciating the  compliment,  is  sometimes  imposed  upon 
by  wholesale   inquiries   from   credit   departments   of 


148         CREDITS  AND  COLLECTIONS 

other  concerns  which  prefer  to  be  guided  by  his  judg- 
ment rather  than  by  their  own.  Then  too,  indiscrimi- 
nate investigations  are  made  by  some  credit  depart- 
ments when  considering,  not  an  existing  account,  but 
a  prospective  customer.  Such  inquiries  are  entirely 
unnecessary,  for  the  facilities  of  the  various  agencies 
are  adequate  to  serve  this  purpose. 


THE   EQUIPMENT   OF   THE  INVESTIGATOR 

In  a  final  analysis,  however,  the  real  value  of  orally 
gathered  information  depends  largely  upon  the  per- 
sonality and  equipment  of  the  investigator.  Results 
will  usually  be  commensurate  with  his  efficiency. 
When  he  first  appears  at  the  credit  office  of  concerns 
he  calls  upon,  he  is  received  as  a  representative  of  his 
house,  but  as  his  visits  continue  he  is  treated  on  his 
own  merits.  The  incompetent,  untrained  young  man, 
incapable  of  drawing  obvious  conclusions,  will  ask 
questions  already  answered  by  the  facts  given,  and  in 
a  routine  way  drag  the  interview  regardless  of  how 
busy  he  may  find  the  credit  man  upon  whom  he  calls. 
Such  tactics  will  hardly  induce  a  discussion  of  the 
account  beyond  the  giving  of  the  usual  stereotyped 
facts. 

Quite  different  are  the  tactics  employed  and  the 
results  obtained  by  the  qualified  investigator.  He  fa- 
miliarizes himself  with  the  status  of  the  account  as 
much  as  possible  before  he  starts  out.  He  knows  what 
he  is  after,  how  to  get  it  and  when  he  has  got  it.  The 
experienced  investigator  is  trained  properly  to  inter- 
pret the  information  obtained  from  the  credit  men  he 


SOURCES  OF  INFORMATION  149 

sees.  He  is  alert  and  quick  to  grasp  the  significance 
of  facts.  Although  he  is  very  careful  to  be  brief, 
he  will,  when  the  occasion  seems  to  require  it,  intelli- 
gently and  tactfully  ask  cjuestions  which  often  yield 
fruitful  replies.  In  a  conversation  of  this  kind,  he 
will  occasionally  impart  information  hitherto  unknown 
to  the  credit  man  he  visits.  These  "tips"  are  valued. 
However,  the  giving  of  them  is  a  delicate  matter.  The 
investigator  must  not  leave  the  impression  that  he  is 
"gossipy."  Obviously  credit  men  will  relate  confiden- 
tial facts,  which  are  always  the  most  valuable,  only 
to  an  investigator  who  can  be  trusted  to  use  them 
discriminately. 

The  above  observations,  concerning  the  required 
personal  qualifications  of  the  investigator,  make  it 
evident  that  investigating  affords  excellent  training  to 
the  credit  assistant  in  preparation  for  his  future  work 
as  credit  man. 

THE  RECIPROCAL  VALUE  OF  ORAL  INVESTIGATIONS 

With  full  confidence  in  the  character  of  the  inves- 
tigator as  a  basis,  the  oral  investigation  facilitates 
reaching  the  highest  point  in  the  system  of  confidential 
interchange.  The  benefits  are  reciprocal,  and  immedi- 
ately so.  At  the  very  moment  the  credit  man  of  the 
concern  visited  is  giving,  he  is  also  receiving  informa- 
tion. A  digression  may  be  permitted  here  to  direct  the 
reader's  attention  to  the  practical  fact  that  one  of  the 
most  exacting  requirements  of  a  credit  man,  who  is 
handling  a  large  volume  of  business,  is  vigilant  and 
close  attention  to  the  status  of  his  accounts,  not  only 


I50         CREDITS  AND  COLLECTIONS 

on  his  own  books,  but  also  in  the  market  generally. 
It  is,  therefore,  not  only  instructive,  but  also  stimu- 
lating to  the  credit  men  visited  to  be  constantly  in- 
formed as  to  the  names  of  those  being  investigated, 
and  the  reasons  therefor,  as  well  as  to  have  these 
opportunities  for  the  ready  exchange  of  experiences 
and  confidences.  Thus,  through  this  system  of  inter- 
change, unfavorable  information  concerning  a  well 
regarded  account  is  often  brought  to  the  credit  man 
without  any  solicitation  on  his  part.  An  unexpected 
development  of  this  character  serves  as  a  signal  of 
caution.  Of  still  greater  importance,  however,  is  the 
effect  of  these  interchanges  in  fostering  co-operation 
among  credit  grantors,  which  in  a  broad  sense  is  so 
essential  to  the  effective  regulation  of  credit.  It  can 
be  readily  understood,  then,  that  the  well  trained  in- 
vestigator is  welcomed  by  practically  every  credit  man 
he  visits. 


CHAPTER    IX 

SOURCES  OF  INFORMATION  (Continued) 

THE  RETAIL  CREDIT  EXCHANGE  BUREAUS 

Recognition  of  the  value  of  the  credit  inter- 
change bureaus  has  given  rise  to  the  organization  of 
many  retail  credit  exchange  bureaus.  The  latter  were 
practically  unknown  twenty  years  ago.  At  that  time 
retail  merchants,  when  extending  credit,  relied  largely 
upon  the  outward  appearance  of  the  applicant  and 
the  meagre  information  available.  Granting  credit  on 
this  basis  may  have  been  satisfactory  then,  owing 
to  the  fact  that  communities  were  smaller,  the 
consumers  were  better  known,  and  by  far  the  larger 
percentage  of  retail  business  was  conducted  on  a  cash 
basis.  But  with  the  growth  of  towns  and  cities,  and 
with  the  great  increase  in  the  system  of  selling  to 
consumers  on  credit,  it  became  necessary  to  evolve  a 
more  scientific  scheme  for  the  basis  of  granting  retail 
credits. 

Applying  the  same  principles  of  co-operation  which 
the  wholesale  houses  have  found  so  valuable,  the  retail 
merchants  organized  credit  exchange  bureaus  through 
which  agency  the  merchants  could  exchange  informa- 
tion relating  to  the  credit  standing  of  their  customers. 
The  methods  employed  in  the  operation  of  this  bureau 

151 


152         CREDITS  AND  COLLECTIONS 

are  quite  similar  to  the  methods  employed  in  the 
wholesale  credit  exchange  bureaus.  Usually,  how- 
ever, the  retail  bureaus  do  not  confine  themselves  to 
the  collection  and  dissemination  of  ledger  facts,  but 
gather  all  other  relevant  credit  information  which 
can  be  obtained  relating  to  consumers  in  the  com- 
munity. 

METHODS  OF  OPERATING 

The  detailed  plans  of  operating  these  bureaus  differ 
widely.  A  simple  but  typical  plan  may  be  described  as 
follows:  Each  line  of  business  is  represented  by  a 
series  of  consecutive  numbers,  and  each  member  of 
the  association  in  the  group  is  given  an  individual 
number;  for  example,  butchers  would  have  numbers 
1-50,  bakers,  50-100,  grocers,  100-150,  and  so  on; 
John  Brown,  a  grocer,  would  be  given  number  107. 
Each  member  when  he  joins  the  association,  sends  in 
a  list  of  names  and  addresses  representing  every  ac- 
count on  his  ledger  and  thereafter  at  regular  intervals 
he  turns  in  the  names  of  new  accounts  opened,  and 
old  accounts  closed,  together  with  the  reasons  for  clos- 
ing the  same.  Some  associations  require  the  member 
to  furnish  complete  data  on  the  standing  of  his  cus- 
tomers at  the  time  of  sending  in  the  lists ;  others  sim- 
ply request  the  member  to  rate  those  names  which  he 
believes  are  not  entitled  to  credit.  A  key  is  usually 
employed  for  the  rating  of  customers. 

Each  customer  is  then  given  a  separate  "master" 
card,  on  which  are  entered  the  numbers  of  members 
with  whom  the  customer  deals  and  all  other  informa- 
tion relating  to  the  customer.    This  other  information 


SOURCES  OF  INFORMATION  153 

includes  the  ratings  and  opinions  given  by  members, 
and  notices  of  mortgages,  bankruptcy  petitions, 
divorce  and  other  suits  clipped  from  the  daily  news- 
papers or  gathered  from  other  sources.  Sometimes 
the  bureau  calls  upon  the  consumer's  employers  for  a 
record  of  his  standing  with  them.  Whenever  the  in- 
formation is  of  such  a  character  that  it  cannot  be  put 
upon  the  card,  such  as  letters  or  lengthy  written  re- 
ports, the  information  is  placed  in  another  larger  file 
and  a  reference  made  to  it  on  the  smaller  cards.  A 
specimen  of  one  of  these  cards  and  of  the  key  used  by 
members  is  given  below. 


MASTER   GARB 

Name.     Smith,  John  J. ;  married.     Family,  6 

Res.         14 1 7  Park  Street 

Bus.        15  Broad  St.;  Bookkeeper,  Brown  Bros. 

Clothing  Co. 

Date 9/16         9/17         ( 

Member's  No.   47             4 
Rating PA           GB 

?/24 

127 
C 

10/3 
32 
P 

11/6         12/4 

143           159 

N             N 

Remarks:     See  File  No.  1137. 

10/26  CM  on  furniture 

purchased,  $175 

RATING 

1 
KEY 

C 

Pays  Cash 

V 

Pays  very  slo^ 

P 

Pays  prompt- 

-bills  less  than  $5 

K 

Account  in  collector's  hands 

l^a 

Pays  prompt- 

-bills  for  $10 

J 

Judgment  taken 

Pb 

Pays  prompt- 

-bills  for  $25 

CM  Chattel  mortgage                 | 

Pc 

Pays  prompt  bUls  for  $50 

T 

Property  attached 

Ci 

Pays  good,  not  prompt 

N 

New  account 

S 

Pays  slow 

154         CREDITS  AND  COLLECTIONS 

When  a  member  desires  information  about  an  ac- 
count which  is  slow  or  a  new  account  he  is  about  to 
open  he  telephones  to  the  bureau.  A  clerk  in  the  bu- 
reau then  reads  to  the  inquiring  member  the  informa- 
tion on  file,  and  immediately  thereafter  the  clerk 
attempts  to  gather  the  most  recent  information  on  the 
subject  of  the  inquiry  by  telephoning  to  all  members 
whose  numbers  appear  on  the  consumer's  card.  When 
this  recent  information  is  compiled,  the  clerk  again 
phones  the  inquiring  member.  In  this  connection,  it  is 
interesting  to  note  that  in  many  bureaus  several  of  the 
members  have  direct  telephone  connections  with  the 
central  office  of  the  bureau. 

INDEBTEDNESS  REPORTS 

The  bureau  also  furnishes  its  members  with  reports 
showing  the  total  indebtedness  of  a  consumer.  The 
knowledge  that  a  consumer  is  overbuying  and  over- 
extending  his  credit  is  of  vital  interest  to  the  retailer, 
and  the  retail  credit  bureau  is  the  only  practical  agent 
for  gathering  and  supplying  this  knowledge.  When  a 
retailer  desires  to  know  how  much  one  of  his  cus- 
tomers or  prospective  customers  owes  to  other  re- 
tailers, he  simply  gets  in  touch  with  the  bureau.  The 
credit  bureau  makes  inquiry  of  each  of  the  members 
who  sell  the  consumer,  and  prepares  a  report  of  the 
information  obtained.  In  many  bureaus  this  report, 
a  form  of  which  is  given  below,  is  sent  to  all  members 
dealing  with  the  subject  of  the  report.  If  the  con- 
sumer is  found  to  have  overextended  his  credit,  the 


SOURCES  OF  INFORMATION 


155 


retailers,  either  through  the  credit  bureau  or  through 
a  committee,  see  that  the  consumer  liquidates  his  debts 
before  any  further  credit  is  extended  by  any  retailer. 

When  a  new  arrival  takes  up  his  residence  in  the 
community,  and  seeks  to  open  charge  accounts  with  va- 
rious local  retailers,  his  former  address  is  obtained,  and 


REPORT  ON  CONSUMER  S  INDEBTEDNESS 

Name.     Smith,  John  J. ;  Married.     Family  6 

Res.  141 7  Park  Street 

Bus.        15  Broad  Street;  Bookkeeper,  Brown  Bros.  Clothing  Co. 


Member 


Amount 
Owing     From 


Amount 
To    Past  Due     Rating 


17     Grocer $  12 

529     Furniture.  . .        175 


12/16  1/17 
10/26  1/17 


$  10 


69     Butcher . 
Total . 


16       11/16     1/17 


Ga 
P 

Install- 
ments (CM) 
Gb 


Remarks: 


10/26     CM  on  furniture  purchased,  $175. 


the  local  credit  exchange  bureau  attempts  to  get  a  re- 
port from  the  credit  bureau  of  the  city  whence  he 
came.  This  is  possible,  of  course,  only  where  such  a 
bureau  exists  in  the  new  applicant's  former  place  of 
residence.  With  the  increasing  number  of  retail 
credit  bureaus,  it  is  anticipated  that  this  practice  will 
be  encouragred. 


156         CREDITS  AND  COLLECTIONS 

ADDED  FUNCTIONS  OF  THE   BUREAU 

Many  retail  credit  bureaus  have  other  functions  in 
addition  to  those  outHned  above.  Some,  for  example, 
send  out  notices  to  all  interested  members  vi^henever 
any  pertinent  credit  information  concerning  a  con- 
sumer is  obtained.  Others  publish  daily  or  weekly  bul- 
letins, which  contain  mention  of  the  following:  all 
changes  in  residence  of  consumers;  recent  arrivals; 
removals ;  mortgages  and  deeds  filed ;  warnings  con- 
cerning fraudulent  schemes  being  worked  on  retailers, 
and  other  special  items  of  importance  to  all  retailers. 
Some  credit  bureaus  publish  rating  books  in  which  are 
listed  the  names  of  all  consumers  in  the  community. 
Each  name  is  given  a  rating,  based  on  the  information 
appearing  on  the  "master"  cards.  The  ratings  in  these 
books  cannot  always  be  relied  upon,  for  they  are  neces- 
sarily at  least  six  months  behind  the  times.  It  re- 
quires practically  this  time  to  compile  the  information 
and  publish  the  book.  For  this  reason,  many  credit 
bureaus  that  formerly  published  these  books  have  dis- 
continued the  practice. 


CHAPTER    X 
SOURCES  OF  INFORMATION  (Continued) 

THE  SALESMAN  AS  A  SOURCE  OF  INFORMATION 

Under  present  day  methods  of  doing  business,  the 
salesman  is  frequently  the  only  representative  of  his 
house  who  ever  sees  the  customer  personally.  More- 
over, in  practice,  he  is  usually  the  only  person  in  his 
house  who  ever  visits  the  customer  at  his  place  of 
business.  It  is  quite  apparent,  then,  that  the  salesman 
is  in  an  excellent  position  to  become  acquainted  with 
the  business  sagacity  and  local  reputation  of  the  cus- 
tomer, and  thus  furnish  the  credit  department  with 
particularly  valuable  information.  For  this  reason,  the 
salesman  has  frequently  been  considered  one  of  the 
most  important  sources  of  credit  information. 

That  the  salesman  is  able  to  supply  information  is 
undisputed.  Whether  or  not  he  will  supply  it  and 
what  the  quality  of  the  information  will  be,  and  how 
he  may  be  encouraged  to  supply  it  are  questions  we 
shall  presently  consider. 

INFORMATION   OBTAINABLE  BY  SALESMAN 

The  salesman  is  "the  man  on  the  ground" ;  he  sees 
the  merchant  at  his  store  and  is  familiar  with  local 

157 


158         CREDITS  AND  COLLECTIONS 

conditions.  He  is  therefore  able  to  furnish  informa- 
tion regarding  the  merchant  on  the  following  points : 
(a)  business  ability,  (b)  habits,  (c)  local  reputation, 
(d)  location,  (e)  local  conditions,  (f)  references,  (g) 
financial  status. 

Business  Ability.  The  salesman  can  quickly  size 
up  the  condition  of  the  merchant's  stock.  He  knows 
at  a  glance  whether  the  stock  consists  of  a  great  deal 
of  out-of-style  merchandise  which,  if  it  ever  sells,  will 
move  very  slowly  indeed.  Then,  too,  by  observing  the 
prices  at  which  merchandise  is  marked  to  sell,  the 
salesman  can  tell  whether  the  merchant  is  making  a 
fair  margin  of  profit  or  is  cutting  prices. 

The  salesman  knows  whether  the  merchant  buys 
recklessly  or  prudently.  He  also  knows  that  a  care- 
less buyer  is  usually  a  careless  payer.  Thus  a  mer- 
chant who  overbuys,  pays  any  price  for  his  merchan- 
dise, or  accepts  any  style  or  pattern,  does  so,  probably, 
because  he  does  not  seriously  consider  his  obligation 
to  pay  the  bills  when  coming  due.  On  the  other  hand, 
a  discriminating  buyer  usually  is  earnestly  concerned 
with  his  duty  to  meet  his  bills  promptly. 

The  method  of  conducting  business  is  another  indi- 
cation of  business  ability,  and  the  failure  or  success 
of  a  merchant  often  depends  upon  the  efficiency  of  his 
business  organization  and  the  manner  in  which  his 
clerks  wait  upon  customers.  All  of  these  things  come 
within  the  salesman's  observation.  Whether  a  cash  or 
credit  business  is  being  done  can  also  be  seen  by  the 
salesman. 

Habits.  Seldom  is  any  one  better  qualified  than  the 
salesman  to  learn  the  habits  of  his  customers.     If  he 


SOURCES  OF  INFORMATION  159 

gains  their  confidence,  he  will  soon  know  whether  they 
are  addicted  to  excessive  drinking,  gambling  or  specu- 
lating. This  information  the  credit  department  must 
have  in  order  to  pass  intelligently  on  the  credit  risk 
involved. 

Local  reputation.  The  salesman  is  usually  ac- 
quainted with  other  local  merchants  and  other  sales- 
men who  visit  the  same  customers,  and  from  their  re- 
marks, the  salesman  may  learn  of  the  local  reputation 
of  the  merchant.  The  salesman  might  even,  when  ab- 
solutely necessary,  visit  the  local  banks  or  attorneys 
and  obtain  their  opinions. 

Location.  Where  the  customer  is  located  in  relation 
to  the  business  center  of  a  small  city  is  an  important 
feature  for  the  credit  man  to  consider  when  deciding, 
not  only  whether  any  credit  is  to  be  given,  but  also  the 
quantity  of  credit  to  be  extended.  Likewise,  whether 
or  not  a  customer's  place  of  business  is  very  close  to  a 
competitive  retail  store  is  a  factor  to  be  taken  into  con- 
sideration by  the  credit  man.  For  information  on  both 
of  these  conditions  the  credit  man  can  rely  on  the 
salesman,  for  he  can  easily  report  on  the  location  of 
customers  when  he  visits  them. 

Local  conditions.  The  credit  department  should 
know  of  those  local  conditions  which  affect  the  entire 
community  and  their  customers'  business  in  particular. 
For  example,  an  important  industry  may  remove  or 
shut  down  or  the  local  crop  may  fail,  with  a  resulting 
decrease  in  the  purchasing  power  of  the  community. 
Or  possibly,  the  street  on  which  the  customer  is  located 
may  be  torn  up,  or  transit  facilities  may  be  changed, 
turninsr  the  traffic  and  business  to  some  other  direc- 


i6o         CREDITS  AND  COLLECTIONS 

tion.  The  salesman  is  in  a  position  to  inform  the 
credit  department  of  these  conditions. 

References.  As  we  have  previously  pointed  out, 
the  references  furnished  by  a  merchant  himself  are 
of  little  value,  for  he  will  be  certain  to  give  only  the 
names  of  those  houses  where  he  pays  his  bills 
promptly;  and  it  is  always  a  comparatively  easy  mat- 
ter to  keep  in  good  standing  with  three  or  four  houses. 
The  credit  department  would  prefer  to  find  out  the 
names  of  the  merchant's  creditors  from  some  other 
source.  Here  the  credit  man  may  turn  to  the  sales- 
man, who  can  readily  obtain  this  information  by  not- 
ing the  merchandise  and  boxes  on  the  shelves  of  the 
merchant.  Many  credit  men  believe  that  in  this  re- 
spect the  salesman  is  a  most  valuable  adjunct  to  the 
credit  department. 

Financial  Status.  When  he  obtains  first  orders 
from  small  dealers  the  salesman  can  sometimes  request 
a  financial  statement  from  the  dealer  to  accompany 
the  order  and  facilitate  the  checking  of  the  order  by  the 
credit  department. 

From  what  has  been  said,  the  reader  should  not 
expect  the  salesman  to  constitute  himself  a  detective 
but  he  has  the  right  to  expect  the  salesman  to  have 
his  eyes  and  ears  open  at  all  times  and  to  be  on  the 
alert  for  any  pertinent  information  obtainable. 

VALUE  OF  salesman's  INFORMATION 

The  value  of  the  information  depends  to  a  large 
extent  upon  the  salesman  himself,  that  is,  upon  how 
much  of  an  authority  he  is  on  general  conditions  and 


SOURCES  OF  INFORMATION  i6i 

on  business  methods.  A  good  part  of  the  informa- 
tion the  salesman  furnishes  is  in  the  nature  of  opin- 
ions, and  must  be  considered  together  with  the  knowl- 
edge and  characteristics  of  the  salesman.  Then,  too, 
one  must  bear  in  mind  that  many  salesmen  are  prone 
to  be  rather  over-optimistic  and  may  permit  their  en- 
thusiasm to  becloud  their  judgment.  On  the  other 
hand,  many  salesmen  are  keen  judges  of  human  nature 
and,  knowing  their  territory  thoroughly,  can  size  up  a 
situation  splendidly, 

SECURING  THE  CO-OPERATION  OF  THE  SALESMAN 

To  what  extent  the  salesman  will  furnish  the  in- 
formation he  can  obtain  and  the  quality  of  the  infor- 
mation depend  to  a  large  degree  upon  the  credit  man. 
If  he  is  broad  minded  and  does  his  work  with  the 
idea  of  business  promotion,  if  he  treats  customers  con- 
siderately and  thus  helps  the  salesman  retain  the  good- 
will of  his  trade,  if  he  gives  proper  consideration  to 
suggestions  offered  by  the  salesman  and  when  neces- 
sary goes  over  the  rejected  orders  with  the  salesman, 
the  credit  man  will  soon  enlist  the  active  assistance  of 
the  salesman.  Furthermore,  by  properly  coaching 
and  encouraging  the  salesman,  the  credit  man  can 
make  him  a  valuable  adjunct  to  the  credit  department. 

A  report  filled  out  by  the  salesman  should  accom- 
pany all  first  orders.  Forms  used  for  this  purpose 
are  found  below.  In  addition  salesmen  should,  from 
time  to  time,  advise  the  credit  man  of  happenings  in- 
volving the  interests  of  their  customers. 


i62         CREDITS  AND  COLLECTIONS 

SALESMAN'S  CREDIT  REPORT 

(This  report  must  accompany  all  first  orders) 
NAME  OF  HOUSE 


Dear  Sirs: — 
I  submit  the  following  information  concerning : — 

Name  of  Firm 

(Give  it  exactly  and  spell  it  correctly) 

Town County State 

Full  name  of  each  partner        Nationality    Age  Married 


The  firm  has  been  in  business  since 

formerly  located  at or  clerked  for 

of or  (here  state  other  antecedents) 


Lines  of  merchandise  carried 

Estimate  of  present  value  of  stock 

Condition  of   stock 

Is  stock  insured  ? How  much  ? 

City  or  country  trade  principally  ? 

Credit  or  cash  business  ? Good  collector  ? 

Location  relative  to  business  centre  ? 

Local  opinion  as  to  habits  ? Ability  ^ 

Expenses  ? Is  firm  thought  making  money  ? 

Is  the  firm,  or  any  member  of  it,  engaged  or  interested  in  other 

ventures  ?    

Real  estate  in  own  name,  if  any,  consists  of 

dwelling  houses vacant  lots 

business  stores  valued  at  $ 

and  mortgaged  for  $ 

Of  this  real  estate  the  following  is  used  as  homestead 

and  valued  at  $ and  mortgaged  for  $ 

If  they  are  just  starting  in  business,  what  capital  has  the  concern 


SOURCES  OF  INFORMATION  163 


and  in  what  shape?    Cash  $ other  assets 

Describe  the  other  assets 


General  local  conditions  affecting  the  business. 


Buy   principally   from   the    following  houses    (give   names    and 
addresses)     


Remarks 


Salesman. 

The  above  is  a  slight  variation  of  a  form  recom- 
mended by  the  National  i\ssociation  of  Credit  Men. 
It  is  efficacious  when  applied  to  the  smaller  traders. 
However,  the  salesman,  calling  upon  the  larger  mer- 
chants, could  hardly  be  expected  to  make  such  detailed 
inquiry.  Moreover,  it  will  be  remembered  a  good  part 
uf  this  information  can  be  had  from  the  agency.  It 
must  also  be  borne  in  mind  that  the  salesman's 
principal  duty  is  to  sell  goods,  and  he  should  not  be 
expected  to  spend  too  much  of  his  time  gathering 
credit  information  which  the  credit  man  can  easily 
obtain  from  other  sources,  for  example,  from  the 
general  agency  reports.  The  salesman's  report  is 
intended  merely  as  a  supplement  to,  and  a  medium  for 
checking  up  the  agency  report.  The  smaller  the  quan- 
tity of  information  the  salesman  is  called  upon  to 
furnish,  the  better  the  information  is  likely  to  be.    And 


1 64         CREDITS  AND  COLLECTIONS 

this  is  to  be  expected,  for  if  the  salesman  is  asked  to 
fill  out  a  very  extensive  blank  form,  he  is  inclined  to 
guess  at  the  answers.  On  the  other  hand,  if  he  is 
requested  to  report  on  only  a  few  important  factors 
affecting  his  customers,  he  has  some  incentive  to  ob- 
tain more  accurate  and  specific  information.  There- 
fore, it  is  usually  better  to  have  the  salesman  report 
only  on  those  matters  which  come  within  his  observa- 
tion, and  upon  which  he  is  peculiarly  qualified  to 
supply  information. 

It  will  be  noticed  that  the  foregoing  report  calls  for 
much  information  that  usually  can  be  readily  obtained 
through  the  general  agencies.  In  most  cases  it  would 
be  better  to  eliminate  the  questions  on  those  points. 
However,  modifications  of  that  report  may  be  adopted 
to  serve  the  special  purpose  of  each  house.  In  any 
event,  the  kind  of  report  will  depend  to  a  large  de- 
gree on  the  kind  of  business  in  which  the  selling  house 
is  engaged,  the  peculiar  conditions  surrounding  the 
business,  and  the  class  of  trade  sold. 

SHORT  FORM  OF  REPORT 

A  simple  form  of  report  which  covers  information 
that  can  be  obtained  by  the  close  observ^ation  of  the 
salesman  without  causing  any  offense  to  his  customers 
and  without  interfering  in  any  way  with  his  chief 
function  of  selling  is  given  below.  This  form  of 
report  could  well  be  used  by  many  houses.  Of  course, 
the  salesman  should  be  coached  and  trained  to  fill  in 
the  reports  properly. 


SOURCES  OF  INFORMATION  165 

NAME  OF  HOUSE 

Name  of  firm 

(Give  it  exactly  and  spell  it  correctly.) 

Address  

Business 

Location  relative  to  business  centre 

Condition  of  stock 

Efficiency  of  organization 

Competency  of  management 

Local  reputation 

Local  conditions  affecting  the  business 

Buy  principally  from . 


Remarks 


ATTORNEYS  AS   CREDIT  REPORTERS 

Another  supplementary  source  of  credit  informa- 
tion is  the  attorney  residing  in  the  same  town  as  the 
debtor.  Like  the  salesman,  the  attorney  sees  the 
debtor  at  his  place  of  business  and  is,  therefore,  in  a 
position  to  furnish  information  concerning  the  local 
reputation  of  the  debtor  and  local  conditions  affecting 
his  standing. 

INFORMATION  OBTAINABLE  BY  ATTORNEY 

In  general,  the  information  which  is  obtainable  by 
an  attorney  is  not  unlike  that  furnished  by  the  sales- 


i66         CREDITS  AND  COLLECTIONS 

man.    Thus  we  find  attorneys  reporting  on  the  follow- 
ing factors  affecting  debtors: 

(a)  Business  ability. 

(b)  Habits. 

(c)  Local  reputation. 

(d)  Location. 

(e)  Local  conditions. 

(f)  Value  of  real  property  and  encumbrances 
thereon. 

(g)  Claims  and  law  suits. 

Business  Ability.  It  is  undoubtedly  true  that  the 
average  lawyer  is  not  a  competent  merchandising  man 
and  is  therefore  not  qualified  to  give  an  expert  opin- 
ion on  the  business  ability  of  a  merchant  by  observing 
the  manner  in  which  the  merchant  conducts  his  busi- 
ness. In  this  respect  the  average  salesman  is  much 
better  qualified.  However,  the  average  lawyer  is  prob- 
ably able  to  recognize  flagrant  violations  of  sound  mer- 
chandising principles  and  can  report  on  obviously  bad 
methods  of  doing  business.  Moreover,  the  attorney 
comes  into  contact  wuth  numerous  other  local  mer- 
chants and  from  them  he  can  easily  obtain  opinions 
as  to  the  business  ability  of  the  subject  of  the  inquiry. 

Habits.  In  the  smaller  towns  the  local  attorney  is 
in  a  splendid  position  to  give  information  on  the  habits 
of  the  local  merchants.  This  is  for  the  reason  that 
the  attorney  is  frequently  acquainted  with  the  personal 
and  family  history  of  local  merchants  from  the  time 
of  their  youth ;  and  what  the  attorney  does  not  know 
from  this  acquaintance,  he  knows  from  the  gossip  of 
other  members  of  the  community.  Of  course,  in 
larger  towns  and  cities,  the  attorney  is  not  able  to 


SOURCES  OF  INFORMATION  167 

obtain  this  information  concerning  the  habits  of  mer- 
chants. 

Local  reputation.  The  attorney,  especially  in 
smaller  communities,  has  a  large  circle  of  business  and 
social  acquaintances  and  friends  from  whom  he  can 
readily  obtain  opinions  as  to  the  standing  of  any  local 
merchant. 

Location  and  local  conditions.  The  location  of  the 
merchant  relative  to  the  business  centre  of  the  com- 
munity can  easily  be  told  by  the  local  attorney.  And, 
so  too,  any  changes  in  local  industries  or  traffic  con- 
ditions that  might  affect  the  entire  community  or  the 
merchant  inquired  about,  come  within  the  easy  ob- 
servation of  the  attorney. 

Value  of  real  property  and  encimibrances  thereon. 
Valuing  the  real  property  of  the  local  merchant  is  en- 
tirely a  matter  of  opinion.  Many  attorneys  are  expert 
in  this  respect,  and,  in  smaller  communities,  can  often 
give  an  off-hand  opinion  of  the  value  of  property 
owned  by  the  merchant  that  will  approximate  its  ac- 
tual value.  This  valuation  the  credit  man  can  use  as  a 
check  on  the  figures  given  by  the  large  agencies  or  by 
the  merchant  in  his  own  financial  statement.  How- 
ever, the  figures  given  by  the  attorney  must  always  be 
considered  in  connection  with  the  attorney's  own  repu- 
tation and  the  quality  of  other  information  furnished 
by  him. 

The  encumbrances  placed  on  the  real  property  of 
the  merchant  are  usually  a  matter  of  record  and  can 
be  readily  and  accurately  ascertained  by  the  attorney 
by  making  a  cursory  search  of  the  records. 

Claims  and  law  suits.     The  local  attorney  is  in  a 


i68         CREDITS  AND  COLLECTIONS 

peculiar  position  to  find  out  about  the  legal  troubles 
besetting  the  local  merchant.  Frequently  the  attorney 
is  called  upon  to  represent  other  jobbing  or  selling 
houses  in  the  collection  of  claims  against  the  debtor 
in  question.  Furthermore,  the  attorney  either  has 
knowledge  or  has  means  of  obtaining  knowledge  of 
law  suits  instituted  by  other  attorneys,  and  of  the  prog- 
ress and  outcome  of  those  suits. 


QUALITY  OF  ATTORNEY  S  REPORTS 

Thus  we  find  that  the  local  attorney  is  situated  so 
as  to  be  able  to  furnish  much  valuable  information 
to  the  credit  man.  This  is  true  especially  where  the 
debtor  resides  in  a  smaller  community.  However,  the 
quality  of  this  information,  like  that  furnished  by  the 
salesman,  depends  practically  entirely  on  the  ability 
and  diligence  of  the  individual  attorney.  We  may  add 
that,  in  general,  the  attorney's  report  is  apt  to  be  less 
dependable  than  that  of  the  properly  trained  sales- 
man's. This  may  be  accounted  for  in  several  ways. 
In  the  first  place,  the  attorney  may  be  quite  friendly 
with  the  merchant  to  be  investigated,  and  in  all  proba- 
bility the  attorney  will  give  his  friend  the  benefit  of 
any  doubt  that  may  exist,  especially  where  merely  an 
opinion  is  requested.  In  the  second  place,  many  attor- 
neys have  a  strong  prejudice  against  foreign  creditors, 
that  is,  creditors  living  in  other  cities  or  states,  and 
do  not  hesitate  to  color  their  reports  to  bolster  the 
credit  standing  of  local  merchants.  They  can  do  this 
and  yet  not  appear  to  have  absolutely  disregarded  the 
truth,  for  the  attorney's  reports  are  based  largely  upon 


SOURCES  OF  INFORMATION  169 

opinions  or  hearsay.  A  third  reason  why  many  at- 
torneys do  not  give  satisfactory  reports  is  because 
this  work  of  furnishing  information  to  distant  cred- 
itors is  merely  an  incidental  matter  for  the  attorney. 
And  this  is  especially  true  where  the  attorney  is  of 
the  better  grade  having  a  large  practice,  for  such  an 
attorney  is  often  too  deeply  engrossed  in  important 
cases  to  give  adequate  attention  to  a  request  for  credit 
information  on  a  local  merchant.  Fifth,  the  compen- 
sation paid  to  the  attorney,  to  which  reference  is  made 
below,  is  hardly  commensurate  with  the  amount  of 
work  that  would  be  involved  in  making  a  thorough 
investigation  of  the  local  merchant.  In  fact,  the  in- 
sufficiency of  the  remuneration  is  in  itself  a  strong 
incentive  to  the  attorney  to  give  off-hand  opinions 
without  substantiating  them  with  any  investigation. 
Sixth,  the  attorney  is  usually  not  acquainted  with  the 
policy  or  credit  standards  of  the  house  making  the 
inquiry  and  consequently  his  opinions,  based  on  en- 
tirely different  standards,  may  be  misinterpreted. 

On  the  other  hand,  many  credit  men  contend  that 
the  reports  of  most  attorneys  who  specialize  in  collec- 
tion work  can  be  relied  upon  as  being  accurate  and 
complete  for,  it  is  contended,  anxiety  of  these  attorneys 
to  furnish  creditors  with  trustworthy  information  and 
thus  win  their  good-will  and  collection  business  more 
than  offsets  any  friendly  local  ties.  Furthermore,  it  is 
said  that  the  commission  earned  by  the  attorneys 
from  the  collection  business  obtained  from  creditors  is 
sufficient  compensation  to  induce  the  attorneys  to  make 
a  thorough  investigation  of  the  local  merchants.    That 


I70         CREDITS  AND  COLLECTIONS 

this  is  true  in  a  great  many  cases  is  undisputed.  Never- 
theless, we  should  not  forget  that  there  are  many  rea- 
sons, which  have  been  enumerated,  why  the  attorneys' 
reports  are  not  always  dependable.  In  any  event,  the 
quality  of  the  report  rests  upon  the  qualities  of  the 
attorney  reporting,  and  there  is  always  some  difficulty 
in  securing  the  right  kind  of  an  attorney,  for  the 
better  qualified  the  attorney,  the  more  likelihood  that 
he  will  be  so  busily  engaged  in  serving  local  clients  that 
he  will  have  but  little  time  to  devote  to  the  interests  of 
outside  creditors. 

There  are,  however,  numerous  Individual  attorneys 
and  firms  which  make  a  specialty  of  collection  work 
and  even  of  furnishing  credit  information.  They  have 
efficiently  trained  employees  for  conducting  credit  in- 
vestigations and  highly  developed  office  systems  for 
keeping  records  relating  to  the  credit  standing  of  cus- 
tomers of  clients.  The  reports  of  these  attorneys  are 
usually  very  reliable.  In  fact,  many  credit  men  find 
that  they  sometimes  obtain  the  first  intimation  of  an 
impending  failure  from  these  attorneys, 

COMPENSATION    OF    REPORTING    ATTORNEYS 

In  return  for  furnishing  business  houses  with  credit 
reports,  the  attorney  is  either  directly  paid  a  small 
fee,  usually  one  dollar,  for  each  report  furnished,  or 
is  indirectly  compensated  by  the  reciprocity  of  the 
business  house  in  turning  over  its  collection  business 
in  the  locality  to  him.  When  the  business  house  has 
some  collections  in  the  town  where  the  attorney  is 
situated,  and  actually  does  send  them  to  him,  the  latter 


SOURCES  OF  INFORMATION  171 

system  of  payment  has  been  found  satisfactory  to  both 
parties.  But  when  only  an  extremely  few  collections 
are  sent  at  distant  intervals,  and  the  requests  for  re- 
ports are  numerous,  the  attorney  is  usually  dissatisfied 
and  will  slur  his  reports.  Then  there  are  many  houses 
which  make  wholesale  inquiries  among  attorneys, 
promising  (but  seldom  giving)  them  collections  for 
their  services  in  rendering  credit  reports.  Sometimes 
these  houses  send  the  same  requests  and  make  the  same 
promises  to  two  or  three  attorneys  in  one  town,  when 
obviously  the  collections  can  hardly  be  sent  to  more 
than  one.  It  is  not  surprising,  under  these  circum- 
stances, to  find  attorneys  who  are  not  very  responsive 
to  requests  for  credit  information,  when  the  only  com- 
pensation for  their  service  is  a  mere  promise  of  col- 
lections. Of  course,  it  is  true  that  practically  all  attor- 
neys who  specialize  in  collections  will  send  a  report  to 
any  house  requesting  it.  This  is  done  in  the  hope  that 
some  collection  business  may  be  forthcoming.  But 
the  quality  of  such  reports  is  usually  inferior.  Where 
collections  are  actually  sent,  or  where  a  fee  of  one 
dollar  accompanies  the  inquiry,  the  attorney  will  give 
much  closer  attention  to  it  and  prepare  a  more  reliable 
report.  The  attorney  is  thoroughly  justified  in  pur- 
suing this  course,  otherwise  many  merchants  would 
impose  on  him  beyond  reason.  It  is,  therefore,  always 
advisable  to  enclose  a  fee,  commensurate  with  the  in- 
vestigation involved,  when  requesting  a  credit  report 
from  an  attorney,  unless,  of  course,  the  attorney  is 
actively  engaged  in  making  collections  for  the  in- 
quiring house,  when  the  fee  can  properly  be  omitted. 


172         CREDITS  AND  COLLECTIONS 


ATTORNEYS     LISTS 


The  names  of  attorneys  who  are  willing  to  serve 
commercial  houses  as  collectors,  and  incidentally,  as 


>ut,.  N«.  1 08.470  '^^^^  ^  ^°  '^''^  '^*  ™  txpiro  May  25.  1916 

M.  A.  HANNA  &  CO., 

G>al,  Coke,  Iron  Ore  and  Pig  InM, 
Uader.Ncws  Bld:^  COAL  DEPARTMENT.  CLEVEUND,  O. 

Tkc  >l>o«e  bm  b  •  «]l>cnbei  to  THE    MARTINDALE   SERVICE  until  tbore  d*t«.   ud  anLded  to  rcpofti 

_   -■!(■«    oi   panr  Rported  oo  bluik  Ime  below,  ickr  off    uul  krrp  thtt   Mub,  vmj  at  cue  oi    •  fulam  >^ 

MTtking  cW  eccvng  to  aS«i  tfaa  o«l«  ei  Mtd  pulj.  gii*  p'Offipl  Dcbn  to  •bore-used  mimaiia,  ^rMT^^^v,'    //* 

Name  of  party  rq»rt«I 


ATTORNEY  WILL  PLEAS£  DETACH.  READ  AND  FILE  THIS  STUB,  AND  NOT  DIVULGE  NAME  OF  INQUIRER 

G)nfidentia]    "  Form    A" 

, Ckvcland.  0.. 19 

Cxprcs  May  25.  1916 


At_ 


Dear  Sir:  — Kindly  favor  m  with  as  [uD  a  repon  ai  possible  of  the  party,  or  firm,  named  below.  wKjch  we  pledge  yoa  we 
win  treat  in  the  ttrictest  conBdeoce.  Mail  to  u*  in  enclosed  stamped  eavdopc  We  will  gUdly  redproule  your  ktadncM  whcn- 
era  opportxiiity  ocotfi,      A  prompt  repty  wiU    be  duTy  apprwialed.  SldlSCrttMr'S  No.    108  470 

Naiae — ._ — — '  R««*— 

Addreti . ., 


1.  FuS  indiridtul  name* , — Ago,  married  of  lingle  » -- 

2.  How  loo«  in  bu«e» 


X     Habib  and  buK>e»  abiDly- 

4.  Etfnated  valoe  of  rtock 

5.  RepDte  m  to  proaptnea  — 


'b.     Aay  boeae  debts  own^ ~- ^ —-Aay  dlaim*  in  Attoniey'a  Kanda  - 

7.     Ewf  (aied — — — befined  to  yeoJate       ■     ■  ■     , 


Caili  tauka  nbe  ct  real  estate  - 


nine  of  real  catatc— 


11.  QtaOel  moalgage* ■     -^ — — -■ 

1 2.  Any  reaource*  outade  at  busneaa- 
I  3.  What  B  yoar  idea  of  nei  woith— 

1 4,  GettiBg  ahead ■ — 

15.  li  party  good  for  $  ...  .     .  ■  ■  ^   < 


t  nport  o«  otbcr  aid*  or  waka  raport  os  yonr  own  ataBoBcry,  typcwrittn  tf  poMSila,  l>«t  c«tw  all  palnta  b  yoW  aaimr. 


credit  reporters,  may  be  found  in  a  number  of  pub- 
lished attorneys'  lists.  These  lists  are  compiled  by 
publishing  houses,  which  usually  charge  each  attorney 
a  small  fee  for  listing  his  name.    The  publishers  make 


SOURCES  OF  INFORMATION  173 

an  effort  to  secure  the  names  of  one  or  more  reputable 
attorneys  specializing  in  commercial  work  in  each 
community.  To  do  this  is  not  always  possible,  as 
many  towns  in  states  where  the  requirements  for  ad- 
mission to  practice  law  are  very  low  have  not  even 
one  reputable  attorney.  Where  this  is  the  case,  an 
attorney  in  an  adjacent  town  or  in  the  county  seat  is 
listed.  The  publishing  houses  do  not  usually  make  a 
very  thorough  investigation  of  the  attorneys  listed. 
Instead,  they  follow  the  practice  of  weeding  out  those 
names  about  which  complaints  are  made  by  business 
houses.  Thus,  after  several  years  of  compiling  lists, 
the  publishing  house  succeeds  in  collecting  a  compara- 
tively good  list  of  reputable  attorneys. 

These  lists,  published  at  regular  intervals,  usually 
annually,  are  then  distributed  to  mercantile  houses. 
In  most  cases  no  charge  is  made  for  the  lists,  the  pub- 
lishing company  relying  entirely  on  the  listing  fees  re- 
ceived from  the  attorneys;  in  other  cases  an  annual 
charge  as  high  as  twenty-five  dollars  is  made  for  the 
lists  and  forms  that  accompany  them. 

attorneys'  report  forms 

In  addition  to  supplying  lists,  the  publishing  com- 
panies usually  furnish  forms  on  which  attorneys  may 
submit  reports.  A  typical  comprehensive  form  is 
found  on  the  preceding  page.  In  making  inquiries  of 
attorneys  a  form  like  the  one  given  usually  produces 
better  results  than  a  mere  general  request  for  credit 
information.  The  form  given  is,  of  course,  merely 
suggestive  and  should  be  modified  to  meet  the  require- 


174         CREDITS  AND  COLLECTIONS 

ments  of  the  individual  creditor.  Usually  the  fewer 
the  questions  asked  on  the  form,  the  better  the  qual- 
ity of  the  information  obtained  will  probably  be. 
Whenever  information  is  wanted  about  one  or  two 
specific  points,  it  is  always  better  to  write  a  letter  than 
to  use  a  general  form. 


BANK    INFORMATION 

The  average  merchant  uses  both  bank  and  mercan- 
tile credit.  One  supplements  the  other.  In  all  cases 
where  a  debtor  obtains  credit  from  both  banks  and 
merchants,  it  is,  of  course,  essential  to  the  safety  of 
one  that  the  debtor  keep  his  credit  standing  good  with 
the  other.  If,  for  instance,  the  debtor's  credit  stand- 
ing should  become  impaired  at  the  bank,  causing  the 
bank  to  withdraw  banking  accommodations,  upon 
which  the  debtor  relies,  the  debtor's  ability  to  pay  his 
mercantile  indebtedness  would  be  seriously  affected. 
Likewise,  if  the  debtor's  mercantile  credit  standing 
were  to  suffer,  so  that  he  could  not  obtain  merchandise 
on  credit,  the  safety  of  the  bank  loan  would  probably 
be  jeopardized. 

Banks  recognize  this  interdependence  of  mercantile 
and  bank  credit.  For  this  reason,  they  are  eager  to 
learn  whether  a  borrower  is  maintaining  a  good  credit 
reputation  among  mercantile  houses.  To  acquire  this 
knowledge,  banks  do  not  hesitate  to  ask  mercantile 
creditors  to  give  their  experiences  and  opinions  re- 
garding a  customer.  As  a  rule,  the  merchants  answer 
these  inquiries  fully  and  frankly. 

Naturally,  the  dispenser  of  mercantile  credit  is  also 


SOURCES  OF  INFORMATION  175 

desirous  of  ascertaining  whether  a  customer  is  main- 
taining his  credit  standing  at  the  bank.  In  fact,  any 
information  disclosing  the  bank  standing  of  a  cus- 
tomer would  be  considered  valuable.  But,  unfortu- 
nately, banks  do  not  often  give  proper  attention  to 
mercantile  creditors'  requests  for  information.  Sel- 
dom do  the  banks  reply  in  the  same  spirit  as  do  the 
merchants.  Usually,  the  information  which  a  bank 
furnishes  is  either  vague  and  evasive,  or  very  gen- 
eral, and  consequently  of  little  value.  Indeed,  most 
banks  prefer  not  to  give  the  detailed  information  which 
they  expect  when  seeking  credit  data  from  merchants. 
In  explanation  the  banks  hold  that  their  position  is 
quite  different  from  that  of  the  mercantile  creditor  in 
respect  to  parting  with  information  regarding  ac- 
counts. In  support  of  this  contention,  the  banks  point 
to  these  facts: 

1.  Banks  work  on  a  very  small  margin  of  profit, 
much  smaller  than  is  usual  in  mercantile  pursuits. 

2.  Banks  deal  in  comparatively  large  units.  Their 
loans  to  any  one  customer  are  usually  larger  than  the 
amount  of  credit  extended  by  merchants. 

3.  A  merchant  is  usually  debtor  to  his  bank  in  a 
much  larger  amount  than  to  any  mercantile  creditor. 

4.  Banks  lend  not  only  their  own  funds,  but  also 
funds  entrusted  to  them  by  depositors. 

For  these  reasons,  banks  are  compelled  to  surround 
their  credits  with  safeguards,  not  usually  required  by 
mercantile  creditors,  and,  in  so  doing,  banks  often 
enjoy  special  confidential  relations  with  borrowers. 
For  instance,  owing  to  a  necessary  ultra-conservative 
policy,  the  bank  might  find  it  advisable  to  obtain  a 


176         CREDITS  AND  COLLECTIONS 

guarantee,  endorsement  or  collateral  as  security.  In 
such  a  case,  many  banks  feel  that  if  a  mercantile  cred- 
itor were  informed  of  this  condition  he  might  mis- 
understand the  nature  of  the  transaction  and  only  be 
impressed  with  the  idea  that  the  borrower's  credit  was 
not  considered  strong  by  the  bank.  The  spread  of  such 
reports  would  be  incalculably  damaging  to  the  borrow- 
er's mercantile  credit. 

Moreover,  the  borrower  often  reveals  to  the  bank 
private  information  which  he  does  not  deem  necessary 
or  advisable  to  make  known  to  mercantile  creditors. 
Banks  cannot,  of  course,  violate  these  confidences. 
Yet,  in  the  interests  of  both  mercantile  and  bank  cred- 
its, the  present  practice  of  the  banks  in  giving  informa- 
tion could  be  considerably  improved,  and  that  without 
violating  any  confidence.  The  tendency  is  in  this  di- 
rection. In  fact,  many  banks  to-day  value  the  recip- 
rocal advantages  of  interchanging  credit  information 
with  merchants  and  are  quite  liberal  in  imparting  in- 
formation to  mercantile  creditors.  Some  banks  even 
have  highly  developed  credit  departments  which  are 
prepared  and  willing  to  give  definite  information  con- 
cerning a  depositor  or  customer.  This  information 
may  include  the  following  points: 

(i)  The  approximate  amount  of  the  customer's 
money  on  deposit  at  the  bank.  • 

(2)  The  amounts  borrowed  by  the  customer  from 
the  bank. 

(3)  The  promptness  of  the  customer  in  meeting  his 
obligations,  with  special  reference  to  the  bank's  loans 
to  the  customer. 

(4)  Whether  many  drafts  are  presented  to  the  cus- 


SOURCES  OF  INFORMATION  177 

tomer  through  the  bank  and,  if  so,  whether  these  drafts 
are  honored  by  the  customer. 

(5)  The  general  local  reputation  of  the  customer 
and  the  bank's  opinion  of  him. 

(6)  The  apparent  financial  strength  of  the  cus- 
tomer. 

Where  these  facts  are  fully  and  frankly  given  by 
the  bank  they  are  extremely  valuable  to  the  credit 
man  as  a  means  of  gauging  the  credit  applicant.  In 
the  first  place,  these  facts  enable  the  credit  man  to  com- 
pare and  verify  the  amounts  of  "cash"  and  "notes 
payable  to  banks"  found  in  the  financial  statement  fur- 
nished by  the  credit  applicant.  In  the  second  place, 
they  enable  the  credit  man  to  form  an  opinion  regard- 
ing the  character  and  general  reputation  of  the  credit 
applicant. 


CHAPTER    XI 
SOURCES  OF  INFORMATION  (Continued) 

THE  PERSONAL  INTERVIEW 

That  it  is  the  function  of  the  credit  man  not  only 
to  safeguard  his  house  against  bad  debt  losses  but  also 
to  assist  in  the  promotion  of  sales,  has  already  been 
observed.  The  policy  of  the  credit  department  of  a 
selling  house  always  is  an  important  consideration  to 
a  purchaser,  when  he  is  planning  where  to  trade.  This 
is  founded  on  good  business  reasons.  An  arbitrary 
narrow  policy  on  the  part  of  the  credit  department 
sometimes  causes  embarrassment  even  to  the  solvent 
customers,  while  judicious,  reasonable  treatment  often 
enables  customers,  whose  affairs  have  become  some- 
what involved,  to  tide  over  their  difficulties  and  avoid 
failure. 

If  the  credit  factor  is  to  be  turned  in  favor  of  the 
selling  house,  no  better  opportunity  is  offered  the 
credit  man  than  when  he  personally  meets  a  customer 
or  a  new  applicant  for  credit.  At  such  meetings  the 
credit  man  must  have  in  mind  that  it  is  as  important 
for  him  to  inspire  the  good  will  of  the  customer  as  it 
is  for  the  latter  to  win  his  confidence. 

Thus  the  credit  man  can  effectively  co-operate  with 
the  sales  department  in  increasing  sales.     However, 

178 


SOURCES  OF  INFORMATION  179 

the  credit  man  is  never  justified  in  loosely  and  impru- 
dently dispensing  credit  in  an  effort  indiscriminately  to 
bolster  sales.  But  giving  the  impression  to  the  credit 
applicant  he  can  rely  upon  fair  and  considerate  treat- 
ment by  the  credit  department  is  not  prejudicial  to 
most  careful  credit  granting. 

THE  CREDIT  MAN's  ATTITUDE 

The  assumption  of  a  friendly  attitude  rather  than 
that  of  a  hostile  cross-examiner  is  not  inconsistent  with 
the  credit  man's  aim  to  be  thorough  in  obtaining  infor- 
mation. He  wants  the  applicant  to  talk  frankly  and 
freely  and  this  can  naturally  best  be  induced  by  friend- 
liness and  candor  on  his  part.  The  interview  should 
bring  to  light  facts  pertaining  to  the  capital  strength, 
organization,  present  conditions  and  outlook  of  the 
credit  applicant's  business.  The  extent  to  which  the 
credit  man  will  inquire  into  details  is  necessarily  gov- 
erned by  the  circumstances  in  each  case.  The  credit 
man  should  bear  in  mind  that  the  information  thus 
obtained  can,  if  desired,  be  supplemented  by  reports 
obtained  through  the  usual  channels. 

ADVANTAGES  OF  THE  PERSONAL  INTERVIEW 

The  personal  interview  should  benefit  both  the  ap- 
plicant and  the  credit  man.  The  beginner,  organizing 
with  a  limited  capital,  has  an  opportunity  to  show 
the  credit  man  that  he  possesses  character,  ability  and 
a  knowledge  of   the   business  undertaken,   and   that 


i8o         CREDITS  AND  COLLECTIONS 

therefore  he  is  entitled  to  credit.  The  established  con- 
cern, regarding  which  unfavorable  reports  may  have 
been  circulated,  can  sometimes  confidentially  give  the 
credit  man  explanations  which  will  satisfy  him  that 
credit  may  be  safely  granted.  Then,  too,  in  an  inter- 
view of  this  kind,  the  credit  man,  having  studied  many 
similar  situations,  is  often  in  a  position  to  ofifer  valu- 
able suggestions  to  the  applicant.  Moreover,  a  con- 
cern in  good  standing  will  sometimes  find  it  advan- 
tageous fully  to  acquaint  the  credit  man  with  its  con- 
dition, so  that  he  may  be  in  a  better  position  to  reply 
to  inquiries  made  by  other  creditors  to  whom  the  ac- 
count is  not  well  known.  On  the  other  hand  the  inter- 
view permits  the  credit  man  to  size  up  an  applicant, 
form  a  personal  impression  of  his  character,  his  ideas, 
and  his  methods  of  doing  business  and  inquire  closely 
into  any  feature  which  requires  it.  As  a  result  he  is 
prepared  either  to  reach  a  satisfactory  conclusion  im- 
mediately, or  to  interpret  more  skilfully  the  informa- 
tion given  in  the  reports.  In  this  connection  it  should 
be  noted  that  in  the  event  the  applicant  deliberately 
omits  to  refer  to  any  materially  unfavorable  facts, 
afterwards  disclosed  in  the  reports,  it  will  have  the 
tendency  of  shaking  confidence. 

The  properly  conducted  interview  enables  the  apn 
plicant  to  present  his  own  case  most  advantageously 
and  to  receive  useful  suggestions;  it  permits  the  credit 
man  to  make  personal  observations  and  to  inquire 
carefully  concerning  doubtful  points  and,  finally,  a  free 
and  frank  discussion  leads  to  a  more  satisfactory 
mutual  understanding. 


SOURCES  OF  INFORMATION  i8i 

TRAVELLING   CREDIT  REPRESENTATIVES 

In  spite  of  the  abundance  of  information  obtainable 
through  the  various  agencies  and  the  other  sources 
of  information,  described  above,  the  credit  man  some- 
times finds  it  desirable  to  make  a  more  personal  inves- 
tigation at  the  place  of  business  of  the  customer. 
These  occasions  arise  especially  when  transactions  with 
a  customer  involve  the  taking  of  more  than  an  ordi- 
nary risk.  In  such  instances  the  credit  man  will  visit 
the  customer  and  look  into  his  affairs.  The  scope  of 
the  inquiry  is  governed  by  the  circumstances  in  each 
case.  When  engaged  in  this  work  the  credit  man  must 
exercise  all  his  resourcefulness  and  tact.  In  the  first 
place,  he  obtains  all  available  information  through  the 
usual  channels  and  is  thus  posted  as  fully  as  possible 
before  he  makes  his  call.  This  information  serves  as 
a  guide  when  interviewing  the  customer.  In  the  inter- 
view the  credit  man,  diplomatically,  gives  the  customer 
an  opportunity  to  explain  at  least  all  the  points  in  the 
reports  which  cast  a  doubt  upon  his  title  to  credit.  To 
what  further  extent  the  investigation  will  go  depends 
upon  the  circumstances  of  the  individual  case.  In 
some  cases  it  may  be  sufficient  to  secure  an  up-to-date 
financial  statement  and  simply  to  discuss  conditions 
generally.  If  the  granting  of  an  abnormal  line  of 
credit  is  to  be  considered,  or  if  serious  weaknesses 
are  disclosed  the  investigation  will  be  much  more 
thorough.  Under  these  circumstances,  the  credit  man 
may  feel  warranted  in  examining  the  books  and  in 
making  other  inquiries  to  satisfy  himself  as  to  the 
financial  strength,  business  methods,  and  business  abil- 


1 82         CREDITS  AND  COLLECTIONS 

ity  of  the  customer.  For  instance,  the  credit  man  may 
make  observations  of  the  orders  on  hand,  the  cost  cal- 
culations, the  stock,  the  organization,  and  the  general 
management  of  the  business  of  the  customer. 

In  the  course  of  the  conversation  with  the  customer 
the  credit  man  will  acquire  an  idea  of  the  future  out- 
look and  also  of  the  customer's  plans  and  policies.  In 
fact  if  the  interview  is  conducted  in  the  right  spirit  the 
debtor  himself  will  frequently  encourage  a  most  ex- 
haustive study  and  discussion  of  his  affairs.  The 
credit  man,  in  turn,  in  view  of  his  broad  experience, 
may  offer  useful  suggestions. 

Some  houses,  on  account  of  the  nature  of  their  busi- 
ness, find  it  advantageous  to  employ  representatives 
to  travel  over  specified  territories,  as  do  salesmen,  and 
visit  all  customers  for  the  purpose  of  inquiring  into 
their  credit  standing.  These  investigators  inquire  into 
the  financial  status,  take  note  of  the  management,  and 
look  into  all  other  conditions  which  may  affect  the 
customer's  debt-paying  ability.  They  also  make  in- 
quiries at  the  banks  and  sometimes  of  other  parties 
to  learn  how  the  customer  stands  in  the  community. 
By  visiting  the  banks  in  person,  the  credit  man  or  his 
representative  can  usually  obtain  more  definite  and  re- 
liable information  than  can  be  obtained  by  correspond- 
ence, for  the  banker  can  hardly  assume  a  non-com- 
mittal attitude  when  talking  face  to  face  with  the 
credit  man. 

In  addition  to  the  foregoing,  the  traveling  credit 
investigator  can  make  valuable  observations  regarding 
local  conditions  which  affect  the  customer.  For  this, 
the  credit  investigator  is  usually  much  better  equipped 


SOURCES  OF  INFORMATION  183 

than  the  salesman.  Moreover,  the  credit  investigator's 
report  is  more  dependable  than  that  of  the  salesman 
for  the  former  is  not  apt  to  be  colored  by  over-opti- 
mism. 


CORPORATION  MANUALS,  SUPPLEMENTS  AND  CARDS 

Houses  which  sell  materials  and  supplies  on  credit 
to  railroads  and  public  utility  concerns  may  obtain  im- 
portant and  valuable  information  from  corporation 
manuals  and  corporation  cards.  These  are  published 
by  three  or  four  concerns  primarily  for  the  use  of  indi- 
viduals, trustees  and  banking  houses  which  invest  in 
the  securities  of  large  corporations.  However,  the 
manuals  and  cards  usually  contain  comparative  balance 
sheets  and  income  statements  of  all  large  corporations 
over  a  period  of  ten  or  more  years,  and  this  informa- 
tion is  practically  indispensable  to  the  well  informed 
credit  man. 

The  best  known  manuals  are  Moody's  and  Poor's. 
Each  of  these  is  published  annually  in  two  sections, 
one  for  railroads,  and  another  for  public  utility  and 
large  industrial  concerns.  In  each  is  found  the  most 
recent  available  income  statement  and  balance  sheet, 
a  summary  of  financial  statements  for  several  ytars 
back,  a  short  description  of  the  important  assets,  and 
a  brief  history  of  the  development  of  each  corporation. 

CORPORATION  CARDS 

Certain  publishing  houses  issue  the  same  informa- 
tion in  card  form.     The  best  known  of  these  is  the 


i84         CREDITS  AND  COLLECTIONS 

Standard  Statistics  Company,  which  furnishes  its  sub- 
scribers with  two  cards  on  each  large  corporation,  one 
of  which  contains  practically  the  same  information  as 
the  manuals,  while  the  other  contains  more  recent  in- 
formation, such  as  monthly  statements  of  earnings, 
current  rumors  or  reports  of  the  business  prosperity 
and  business  difficulties  of  the  particular  corporation, 
etc.  New  cards  on  each  corporation  are  issued  to  the 
subscribers  as  new  reports  come  out.  A  cabinet  is 
also  supplied  to  hold  all  the  cards. 

The  credit  man  who  does  not  desire  the  complete 
service  may  obtain  cards  on  individual  companies  at  a 
nominal  cost, 

In  addition  to  the  above,  the  various  publishing  com- 
panies issue  either  daily  or  monthly  sheets  containing 
revisions  and  current  information  on  all  companies 
listed  in  the  manuals  or  on  the  cards. 

At  least  one  of  these  services  should  be  at  the  com- 
mand of  the  credit  man  of  a  house  selling  to  railroads 
and  public  utilities.  Even  the  credit  man  of  the  housi' 
selling  to  large  industrial  corporations  can  obtain  im- 
portant information  in  convenient  form  from  these 
sources. 

TRADE  AND   FINANCIAL   PAPERS 

To  keep  posted  on  items  of  interest  concerning  his 
customers  and  the  territory  served  by  his  customers, 
the  credit  man  should  also  subscribe  for  and  read  the 
trade  papers  of  the  lines  in  which  he  and  his  customers 
are  interested.  Then,  too,  a  credit  man  of  a  house 
selling  to  railroads,  public  utilities,  and  large  indus- 
trial corporations  will  do  well  to  read  regularly  one 


SOURCES  OF  INFORMATION  185 

or  more  of  the  leading'  financial  papers,  where  he  may- 
find  items  regarding  his  customers. 

The  credit  man  should  also  read  carefully  one  or 
more  magazines  on  general  business  conditions  in  the 
various  parts  of  the  country  so  that  he  may  intelli- 
gently analyze  the  fundamental  conditions  affecting 
the  ability  of  his  customers  in  different  localities  to 
make  prompt  payments.  In  this  connection  the  serv- 
ices of  the  Babson  and  the  Brookmire  statistical  or- 
ganizations are  a  valuable  means  of  keeping  informed 
on  changes  in  fundamental  business  conditions. 


CHAPTER    XII 

THE  FINANCIAL  STATEMENT 

One  of  the  most  important  sources  of  credit  infor- 
mation is  the  financial  statement  of  the  debtor  or  credit 
appHcant.  From  this  statement  can  be  obtained  cer- 
tain facts  that  are  not  available  to  the  credit  man  from 
any  other  sources.  For  example,  the  details  of  the 
credit  applicant's  assets,  liabilities,  insurance,  encum- 
brances, and,  in  some  cases,  the  debtor's  income  and 
expenses,  may  be  obtained  through  the  financial  state- 
ment. These  are  essential  facts;  and  when  fully  and 
accurately  stated  are  especially  illuminating  in  the 
ascertainment  of  the  financial  strength  of  a  concern. 

STATEMENTS  OBTAINED  THROUGH  THE  AGENCIES 

By  far  the  greatest  number  of  financial  statements 
come  through  the  commercial  agencies,  but  these  are 
frequently  incomplete  or  too  inadequate  to  be  used  by 
the  credit  man  as  a  basis  for  intelligent  analysis. 
Moreover,  the  financial  statements  in  the  agency  re- 
ports are  at  times  entirely  out  of  date.  Furthermore, 
some  of  the  statements  in  the  reports,  on  account  of 
the  reluctance  of  some  concerns  to  fill  out  the  state- 
ment forms  of  the  agencies,  are  obtained  orally  by  the 
agency's  reporter.     In  such  cases  the  merchant  giving 

'.86 


THE  FINANCIAL  STATEMENT         187 

the  statement  may  do  so  in  an  off-hand,  careless  way, 
with  httle  regard  to  the  accuracy  of  the  figures  fur- 
nished. Of  course  then  the  tendency  is  for  the  mer- 
chant to  overestimate  his  assets  and  to  forget  some  of 
his  HabiHties.  On  the  other  hand,  where  the  merchant 
is  called  upon  to  fill  out  a  carefully  prepared  form 
furnished  by  his  creditor,  greater  care  will  be  exer- 
cised in  compiling  the  statement. 

REASONS  FOR  OBTAINING  STATEMENTS  DIRECT 

Another  reason  why  it  is  advisable  for  a  creditor  to 
obtain  written  financial  statements  at  regular  intervals 
direct  from  the  debtor  is  the  beneficent  moral  influence 
this  practice  exerts  on  the  debtor.  In  the  first  place 
the  debtor  realizes  that  his  credit  standing  will  be 
influenced  materially  by  the  kind  of  a  statement  he 
presents.  He  will,  therefore,  keep  his  business  and 
assets  in  as  good  condition  as  possible,  so  as  to  be 
able  to  present  a  favorable  statement.  Thus,  the  spec- 
ulatively inclined  merchant,  before  entering  any  haz- 
ardous undertaking,  will  stop  to  think  of  the  effect  of 
the  outcome  of  any  proposed  venture  on  the  appear- 
ance of  his  balance  sheet.  In  the  second  place,  the 
incompetent  trader  is  weeded  out,  for  as  a  rule  he  is 
unable  to  present  satisfactory  financial  statements.  If, 
on  the  other  hand,  statements  are  not  required  of  such 
a  trader,  creditors  may  not  discover  his  failings  in 
time,  with  the  result  that  they  will  unwisely  grant 
credit  to  him  permitting  him  to  continue  in  business. 
And  this  is  extremely  unfortunate  for  the  honest,  ca- 
pable dealer,  for  the  incompetent  merchant  is  inclined 


i88         CREDITS  AND  COLLECTIONS 

63 — Statement  of  Incorporated  Co. 
SENT   OUT NO. RETURNED 

Business  Established  1849. 

THE  BRADSTREET  COMPANY, 

INCORPORATED 

Executive  Offices,  346  and  348  Broadway,  New  York. 


Offices  in  the  Principal  Cities  of  the  United  States,  Canada,  Cuba,  Mexico,  Australia 
and  in  London,  England,  with  an  Established  List  of  Corre- 
spondents Throughout  the  Civilized  World. 


New  York  Office — 346  and  348  Broadway. 

New  York  City, 191. 


M.. 


We  respectfully  request  that  you  furnish  us  a  statement  of  your 
financial  condition,  on  the  within  form,  in  such  detail  as  you  may 
elect,  with  a  view  to  insure  the  correctness  of  our  report.  By  so 
doing  the  chances  of  error  will  be  lessened  and  confidence  inspired 
in  the  minds  of  grantors  of  credit. 

Those  of  whom  you  buy  must  get  information  regarding  your 
responsibility,  and  employ  The  Bradstreet  Company  to  make  the 
necessary  investigation.  That  we  may  be  better  enabled  to  serve 
them  and  yourself  is  the  sole  object  in  making  this  request. 

We  ask  such  attention  as  the  subject  deserves. 

The  Bradstreet  Company. 

4-10-'16-3m  Per. _ _.. 


THE  FINANCIAL  STATEMENT 

63 — Statement  Incorporated  Co. 


189 


Date 


.19.. 


Statement  made  by- 
Corporate  Style 

Business 


Where  located — ■ 

Name  of  City  or  Village.. 
County. 


Street  and  Number _ „ State.. 

Date  of  Charter _ _ _ 

Incorporated  in  what  State 

Commenced  when _ _ _ 

Succeeding  whom  ..„ „ „ 


OFFICERS. 
Full  Given  and  Surnames. 

Vice-President 

Secretary 

Treasurer 


Residence. 


DIRECTORS. 
Full  Given  and  Surnames. 

Residence. 

- 





I90         CREDITS  AND  COLLECTIONS 

CAPITAL 

Authorized                  Subscribed  Paid  in 

Common  Stock,     .       $ $ $ 

Preferred  Stock,     .       $ _ $ $ 

How  PAID  in: 

In  cash $ 

Patents,  trade-marks,  patterns,  etc.,     $ 

In  other  property $ $ 

Give  particulars  and  the  value  of  each  kind  of  property _ 


ASSETS 19 

Cash  in  bank, $ 

Cash  on  hand _ _. 

Notes  receivable,  actual  value 

Accounts  receivable,  actual  value, 

Merchandise  (finished  and  unfinished), 

Raw  Material 

Machinery  and  fixtures 

Real  Estate 

Other  investments  (specify) 


Total  Assets, $ 

How  much,  if  any,  of  above  Accounts  Receivable  have 
been  assigned  or  pledged  for  loans,    .    $ 


LIABILITIES, 19 

Capital  stock  paid  in $ 

Surplus  and  undivided  profits, 

Bills  payable ,      

Accounts  payable 

Bonded  debt 

Mortgage  on  real  estate  (not  included  as  Bonded  debt), 
Chattel  mortgage  on  all  kinds  of  property  .... 
Borrowed  money  from  banks  (not  included  above),    . 

"         "     individuals  (not  included  above) 
All  other  liabilities 


Total  Liabilities, 


How  much,  if  any,  of  the  above  indebted- 
ness is  past  due I 

Over 


THE  FINANCIAL  STATEMENT 


191 


Amount  of  annual  business $ 

Amount  of  annual  expenses,        

Annual  dividend 

Surplus  (not  including  undivided  profits), $ 

Indebtedness  of  company  to  stockholders  included  in  liabilities- 
Amount  of  insurance  on  merchandise, $ 

Amount  of  insurance  on  buildings  and  plant $ 

Ever  had  a  fire;  if  so,  give  particulars „ 


Is  plant  protected  by  automatic  sprinklers . 
Other  interests  of  principal  directors 


Bank  with 


TRADE  REFERENCES  from  whom  PRINCIPAL  purchases  are  made. 


Give  Address  of  Each. 


Name . 

Address . 

Name 

Address  . 

Name 

Address  . 

Name 

Address  . 

Name 

Address  . 

Name 

Address  . 


Amount  Owing 


REMARKS. 


Sign  here.. 


Official  Signature. 


192         CREDITS  AND  COLLECTIONS 

to  undersell,  especially  when  he  needs  funds,  regard- 
less of  costs,  and  thus  offer  the  meanest  kind  of  com- 
petition. Creditors,  for  their  own  good  and  profit, 
should  protect  the  competent  trader  against  such  com- 
petition. This  can  be  done  very  effectively,  as  we  have 
seen,  by  demanding  financial  statements.  In  the  third 
place,  creditors,  by  demanding  financial  statements,  can 
frequently  deter  dishonest  debtors  from  committing 
frauds.  This  is  accounted  for  by  the  fact  that  false 
statement  laws  have  been  enacted  in  a  number  of  states, 
which  make  it  a  crime  for  a  merchant  to  present  a 
false  statement  in  writing  for  the  purpose  of  securing 
credit. 

FALSE  STATEMENT  LAWS 

How  the  false  statement  laws  act  as  a  deterrent 
upon  fraudulent  debtors  is  perhaps  best  described  in 
a  memorandum  prepared  by  Julius  Henry  Cohen,  as 
counsel  for  the  National  Association  of  Credit  Men. 
It  should  b6  remembered  that  it  was  chiefly  through 
the  instrumentality  of  this  association  in  co-operation 
with  its  local  constituents,  the  bankers'  associations 
and  other  commercial  organizations,  that  the  false 
statement  laws  of  the  several  states  were  enacted.  The 
memorandum  reads: 

Nearly  every  state  has  some  form  of  statute  for 
the  punishment  of  offenders  who  obtain  money  or 
property  by  means  of  false  pretenses  or  representa- 
tions ;  but  such  statutes  have  proved  inadequate  in  nu- 
merous cases  where  frauds  have  been  perpetrated  in 


THE  FINANCIAL  STATEMENT         193 

connection  with  false  statements  of  condition.  Ex- 
perience has  shown  that  a  special  statute  upon  this  par- 
ticular subject  is  necessary.    The  present  law  ^  is  broad 

^  A  uniform  false  statements  law  enacted  in  New  Jersey, 
New  York  and  Rhode  Island  and  pending  in  other  states. 
The  New  York  Act,  which  may  be  taken  as  an  illustration, 
provides : 

(i)  Any  person  who  shall  knowingly  make  or  cause  to  be 
made,  either  directly  or  indirectly,  or  through  any  agency 
whatsoever,  any  false  statement  in  writing,  with  intent  that 
it  shall  be  relied  upon,  respecting  the  financial  condition,  or 
means  of  ability  to  pay,  of  himself,  or  any  other  person,  firm 
or  corporation,  in  whom  he  is  interested,  or  for  whom  he  is 
acting,  for  the  purpose  of  procuring  any  form  whatsoever, 
either  the  delivery  of  personal  property,  the  payment  of  cash, 
the  making  of  a  loan  or  credit,  the  extension  of  a  credit,  the 
discount  of  an  account  receivable,  or  the  making,  acceptance, 
disccunt,  sale  or  indorsement  of  a  bill  of  exchange,  or  promis- 
sory note,  for  the  benefit  of  either  himself  or  such  person, 
firm  or  corporation;  or 

(2)  Any  person  who,  knowing  that  a  false  statement  in 
writing  has  been  made,  respecting  the  financial  condition  or 
means  or  ability  to  pay,  of  himself,  or  such  person,  firm  or 
corporation  in  which  he  is  interested,  or  for  whom  he  is  act- 
ing, procures,  upon  the  faith  thereof,  for  the  benefit  either 
of  himself,  or  of  such  person,  firm  or  corporation,  either  or 
any  of  the  things  of  benefit  mentioned  in  subdivision  one  of 
this  section;  or 

(3)  Any  person  who,  knowing  that  a  statement  in  writ- 
ing has  been  made,  respecting  the  financial  condition  or  means 
or  ability  to  pay  of  himself  or  such  person,  firm  or  corpora- 
tion, in  which  he  is  interested,  or  for  whom  he  is  acting, 
represents  on  a  later  day,  either  orally  or  in  writing,  that 


194         CREDITS  AND  COLLECTIONS 

enough  to  cover  all  cases  of  the  making  of  false 
written  statements  to  procure  property  or  credit  in  any 
form,  including  cases  where  such  statements  are  made 
directly  to  the  one  from  whom  property  or  credit  is 
sought,  as  to  a  merchant  or  to  a  bank,  or  indirectly, 
as  where  made  to  a  mercantile  agency  or  a  note  broker 
to  be  used  as  a  source  of  reliance  by  the  banker  who 
loans  money  and  purchases  paper,  or  by  the  merchant 
who  sells  goods.  Furthermore,  it  aims  at  the  person 
who  makes  the  statement  or  causes  it  to  be  made, 
whether  such  person  seeks  the  credit  for  himself  or 
for  any  other  person,  firm,  or  corporation.  Subdivi- 
sion I  punishes  the  mere  making  of  a  false  statement 
in  writing,  with  intent  that  it  shall  be  relied  upon,  for 
the  purpose  of  procuring  credit;  subdivision  2  pun- 
ishes the  person  who  procures  property  or  credit  upon 
the  faith  of  a  false  statement,  such  person  not  neces- 
sarily being  the  one  who  made  the  statement ;  and  sub- 
division 3  punishes  the  person  who  falsely  represents 
that  a  previous  written  statement  is  true  with  respect 
to  present  financial  condition  and  thereby  procures 
credit. 

such  statement  theretofore  made,  if  then  again  made  on  said 
day,  would  be  then  true,  when,  in  fact,  said  statement  if  then 
made  would  be  false,  and  procures  upon  the  faith  thereof, 
for  the  benefit  either  of  himself  or  of  such  person,  firm  or 
corporation,  either  or  any  of  the  things  of  benefit  mentioned 
in  subdivision  one  of  this  section. 

Shall  be  guilty  of  misdemeanor  and  punishable  by  imprison- 
ment for  not  more  than  one  year  or  by  a  fine-  of  not  more 
than  $1,000  or  both  fine  and  imprisonment. 


THE  FINANCIAL  STATEMENT         195 

DIFFERENCES  IN  THE  THREE  STATUTES  ENACTED  IN 

I912 

In  New  York  and  Rhode  Island  the  republication  of 
a  statement  under  Subdivision  3  may  be  made  "either 
orally  or  in  writing."  In  New  Jersey  the  words  "either 
orally  or"  are  omitted,  so  that  reaffirmance  of  the 
statement  must  be  made  in  writing.  The  only  other 
difference  is  in  punishment.  In  New  York  the  punish- 
ment is  imprisonment  not  exceeding  one  year,  or  by 
fine  not  exceeding  $1,000,  or  both.  In  Rhode  Island 
it  is  imprisonment  not  exceeding  one  year,  or  by  fine 
not  exceeding  $500,  or  both,  and  in  New  Jersey  it  is 
imprisonment  not  exceeding  three  years  and  a  fine  not 
exceeding  $1,000. 

THE    CHANGED    CONDITION    BROUGHT    ABOUT    BY    THE 
STATUTE 

In  order  to  restrain  the  making  of  false  statements, 
it  is  now  made  a  crime  to  make  such  a  statement 
falsely  "with  intent  that  it  shall  be  relied  upon." 

Heretofore,  the  only  statutes  under  which  prosecu- 
tions could  be  maintained  in  most  states,  and  especially 
in  the  state  of  New  York,  were  the  statutes  relating  to 
larceny.  The  Penal  Law  (Section  1290)  made  it  a 
felony  for  any  one  fraudulently  to  procure  from  an- 
other, by  means  of  false  pretences,  any  property.  In 
order  to  come  within  this  statute,  it  had  been  necessary 
to  prove  "the  intent  to  deprive  or  to  defraud  a  true 
owner  of  his  property,  or  to  appropriate  the  same  to 
the  use  of  the  taker  or  of  any  other  person"  .  .  .  "by 


196         CREDITS  AND  COLLECTIONS 

color  or  aid  of  fraudulent  or  false  representation  or 
pretence."  As  this  law  was  the  development  of  the 
original  law  of  larceny  from  the  person,  i.  e.,  the 
physical  taking  of  property  from  another,  it  had  been 
necessary  to  establish  the  following  elements  in  order 
to  come  within  the  statute : 

(a)  The  intention  to  deprive  or  defraud  the  true 

owner  of  his  property ; 

(b)  The  obtaining  of  the  property ; 

(c)  Fraudulent   or    false   representations   or   pre- 

tences. 

There  was  required,  in  addition  to  proof  of  the 
falsity  of  the  pretences  and  the  making  of  the  pre- 
tences, proof  of  reliance  thereon  by  the  person  who 
was  defrauded,  and  of  delivery  of  property  to  the  de- 
fendant charged  with  the  crime.  Many  examples  might 
be  given  of  the  difficulty  of  establishing  so  complete  a 
chain  of  evidence.  For  example,  in  a  recent  case  in 
New  York,  the  prosecution  wholly  failed  because  of 
the  inability  to  trace  the  property  directly  to  the  de- 
fendant. As  modern  business  is  now  conducted,  it  is 
very  rarely  indeed  that  property  passes  from  hand  to 
hand, — directly  from  the  seller  to  the  purchaser.  Usu- 
ally the  goods  are  shipped  by  express,  and  all  that  the 
seller  holds  is  a  receipt  signed  by  some  clerk.  To  meet 
the  rules  of  evidence  it  was  necessary  to  call  sometimes 
as  many  as  twenty  witnesses  to  trace  the  property  from 
the  complainant  to  the  defendant  (although,  as  a  mat- 
ter of  fact,  everybody  was  morally  certain  that  the  de- 
fendant got  the  goods  and  put  them  in  stock).     In 


THE  FINANCIAL  STATEMENT        197 

addition,  it  was  necessary  to  show  that  the  defendant 
did  not  intend  to  pay  for  the  goods. 

Besides,  it  frequently  happened  that  a  merchant, 
hoping  to  tide  over  his  difficulties,  would  exaggerate 
the  statement  of  his  assets  and  liabilities,  but  with  no 
intention  to  defraud  the  merchants  who  extended 
credit  to  him.  In  all  cases  of  larceny,  the  court  would 
charge  the  jury  that  if  they  found  that  the  defendant 
honestly  intended  to  pay  for  the  merchandise,  even 
though  they  found  that  the  statement  was  false,  they 
must,  nevertheless,  acquit. 

The  new  statute  meets  all  of  these  difficulties.  The 
only  elements  of  proof  required  against  the  defendant 
are: 

1st :      That  he  made  a  statement ; 

2nd  :     That  the  statement  is  false ; 

3rd :     That  he  made  it  with  the  intention  that  it 

should  be  relied  upon; 
4th :     That  he  made  it  for  the  purposes  of  securing 

credit  in  some  form  or  other. 

It  is  clear  that  a  statement  may  be  false  without  be- 
ing fraudulent ;  that  is  to  say,  it  may  be  exaggerated 
without  intention  to  defraud  any  one.  It  may  be  un- 
true in  fact,  but  it  may  be  made  with  innocent  intent. 
The  merchant  may  intend  to  continue  business  and  pay 
for  the  goods.  The  new  statute,  however,  stops  pre- 
cisely this  thing  and  makes  it  a  misdemeanor  to  make 
a  false  statement,  even  without  fraudulent  intent.  It 
is  based  upon  the  same  principle  that  makes  the  carry- 
ing of  a  deadly  weapon  a  crime.    If  the  weapon  is  used 


198         CREDITS  AND  COLLECTIONS 

to  commit  murder,  the  defendant  is  guilty  of  murder, 
but  we  do  not  wait  until  he  commits  murder  if  we  find 
him  possessed  of  a  deadly  weapon.  The  possession  of 
instruments  of  crime  is  made  a  crime,  so  as  to  deter 
the  commission  of  more  serious  crime.  Hence,  the 
making-  of  a  false  statement,  even  though  without 
fraudulent  intent,  is  made  a  misdemeanor. 

One  of  the  weaknesses  of  the  larceny  law  as  it  ex- 
isted was  that  it  required  proof  of  the  physical  dehvery 
of  property  to  the  defendant.  In  consequence,  mere 
extension  of  time  in  which  to  pay  a  debt  already  exist- 
ing could  not  be  made  the  basis  of  a  charge  of  larceny. 
To  the  business  man  the  extension  of  credit  is  synony- 
mous with  the  delivery  of  something  of  value,  but  it  is 
not  "larceny"  within  the  meaning  of  the  statute.  In 
like  manner,  there  was  great  doubt  as  to  whether  or 
not  the  passing  of  a  discounted  note  to  the  credit  of  a 
depositor  constituted  the  passing  of  property  from  the 
bank  to  the  depositor  within  the  meaning  of  the  stat- 
ute. The  language  of  the  new  statute  is  devised  to 
meet  precisely  such  situations. 

The  second  paragraph  of  the  new  law  covers  the 
case  where  one  member  of  a  firm  makes  the  statement 
and  another  procures  the  credit  or  property  thereon, 
and  also  the  case  where  the  director  of  a  corporation 
procures  property  for  the  benefit  of  the  corporation  in- 
stead of  for  himself. 

The  third  section  provides  for  the  case  of  a  "re-ut- 
tered statement,"  that  is,  where  the  statement  has  been 
made  in  writing  and  subsequently  republished,  either 
orally  or  in  writing,  on  a  later  date.  This  provision 
is    (except  in  New  Jersey)   that  any  person  "who, 


THE  FINANCIAL  STATEMENT         199 

knowing  that  a  statement  in  writing  has  been  made 
.  .  .  represents  on  a  later  day,  either  orally  or  in  writ- 
ing, that  such  statement  theretofore  made,  if  then  again 
made  on  said  day  would  then  be  true,  when  in  fact 
said  statement  if  then  made  would  be  false,  procures 
upon  the  faith  thereof  any  of  the  things  mentioned  in 
the  statute,  is  likewise  guilty  of  a  misdemeanor." 

Summing  up  the  change  that  is  made  in  the  law, 
it  may  be  said  that  the  man  who  with  deliberate 
intent  starts  out  to  defraud  his  creditors  must  now 
reckon  upon  different  provisions  of  the  law  than 
were  in  existence  before.  If  he  steals  goods  from  his 
creditors,  by  means  of  false  pretences,  he  will,  as  be- 
fore, render  himself  liable  for  prosecution  for  larceny. 

As  for  the  man  who  seeks  to  bolster  up  his  credit, 
without  any  intent  to  defraud  his  creditors,  but  with 
the  deliberate  intent  to  build  up  his  business,  he  should 
be  upon  his  guard.  If  he  should  subsequently  go  into 
bankruptcy,  and  the  falsity  of  the  statement  be  dis- 
covered, upon  proof  of  the  falsity  of  the  statement 
he  may  find  himself  charged  with  crime  under  the  pro- 
visions of  the  law  relating  to  "false  statements,"  and 
it  will  not  avail  him  that  proof  of  the  delivery  of  the 
property  to  him  cannot  be  made.  If  he  made  the  false 
statement,  knowing  it  to  be  false,  with  the  intention 
that  it  should  be  relied  upon  for  the  purpose  of  ob- 
taining credit,  he  is  guilty  of  a  misdemeanor. 

If  it  be  said  that  this  law  is  drastic  and  may  reach 
honest  men  who  are  not  intentional  criminals,  the  an- 
swer is  two-fold.  First,  there  is' little  risk  of  convict- 
ing men  who  make  honest  failures.  It  rarely  happens 
that  men  who  surrender  all  of  their  property  to  their 


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202         CREDITS  AND  COLLECTIONS 

creditors  find  any  difficulty  in  gaining  their  feet.  Sec- 
ond, the  mere  existence  of  the  statute  is  a  deterrent  to 
crime,  because  the  business  man  will  hereafter  stop 
and  think  before  putting  his  signature  upon  written 
statements. 

As  a  basis  for  building  up  the  credit  of  this  country 
the  statement  of  financial  condition  has  become  an  in- 
strument of  great  importance.  The  signed  check  may 
have  no  greater  value  than  five  dollars,  but  the  signed 
financial  statement  may  have  a  value  of  many  thou- 
sands of  dollars.  Let  the  man  who  makes  a  statement 
in  writing  realize  that  he  assumes  responsibility  as 
great  as  that  of  signing  a  check;  and  that  before  sign- 
ing it  he  must  know  that  he  has  the  assets  and  the  sur- 
plus mentioned  therein.  The  entire  theory  of  the  law 
is  that  if  those  who  extend  credit  do  so  in  reliance  upon 
information  within  the  knowledge  and  control  of  the 
person  giving  it,  the  person  giving  it  should  not  give 
false  information,  except  at  his  peril. 

It  must  not  be  forgotten  that  the  honest  business 
man  benefits  by  every  extension  of  the  criminal  law 
that  reaches  the  dishonest  business  man.  No  man  can 
compete  with  another  who  buys  goods  that  he  never 
intends  to  pay  for.  The  latter  can  afford  to  sell  his 
goods  below  cost.  The  honest  merchant  has  nothing 
to  fear  from  the  new  statutes,  but  the  dishonest  mer- 
chant has  everything  to  fear. 

THE  FEDERAL  LAW 

In  addition  to  the  various  state  laws  makinsr  the 
issuance  of  false  statements  for  the  purpose  of  obtain- 


THE  FINANCIAL  STATEMENT        203 

ing  credit  a  crime,  there  is  a  Federal  law  ^  under  which 
debtors  who  have  secured  merchandise  on  credit  by 
mailing  false  financial  statements  may  be  successfully 
prosecuted.  To  obtain  a  conviction  under  the  Federal 
law,  which  imposes  more  severe  punishment  on  fraud- 
ulent debtors  than  do  the  state  laws,  it  is  necessary  to 
prove  not  only  that  the  debtor  issued  a  false  statement 
in  writing  and  secured  merchandise  on  credit  on  the 
basis  of  the  statement,  but  also  that  the  statement  was 
sent  through  the  mails.  Therefore,  in  order  to  aid  in 
the  prosecution  of  fraudulent  debtors  under  the  Fed- 
eral law,  the  creditor  receiving  a  statement  through 
the  mail  should  attach  the  envelope  in  which  the  state- 

^U.  S.  Crim.  Code,  Sec.  215: 

"Whoever,  having  devised  or  intending  to  devise  any 
scheme  or  artifice  to  defraud,  or  for  obtaining  money  or  prop- 
erty by  means  of  false  or  fraudulent  pretences,  representa- 
tions or  promises — shall,  for  the  purpose  of  executing  such 
scheme  or  artifice  or  intention  so  to  do,  place  or  cause  to 
be  placed,  any  letter,  postal  card,  package,  writing,  circular 
pamphlet  or  advertisement,  whether  addressed  to  any  person 
within  or  outside  the  United  States,  in  any  postoffice,  or 
station  thereof,  or  street  or  other  letter  box  of  the  United 
States,  or  authorized  depository  for  mail  matter,  to  be  sent 
or  delivered  by  the  postoffice  establishments  of  the  United 
States,  or  shall  take  or  receive  any  such  therefrom,  whether 
mailed  within  or  without  the  United  States,  or  shall  know- 
ingly cause  to  be  delivered,  by  mail  according  to  the  direction 
thereon,  or  at  the  place  at  which  it  is  directed  to  be  delivered 
by  the  person  to  whom  it  is  addressed,  any  such  letter,  postal 
card,  package,  writing,  circular  pamphlet  or  advertisements, 
shall  be  fined  not  more  than  the  $1,000,  or  imprisoned  not 
more  than  five  years,  or  both." 


204         CREDITS  AND  COLLECTIONS 

ment  is  received  to  the  statement  itself  and  retain  both 
in  his  files.  To  facilitate  retaining  the  envelopes,  the 
National  Association  of  Credit  Men  has  devised  a  com- 
bined statement  form  and  mailing  envelope,  a  copy  of 
which  is  reproduced  on  page  206, 

REASONS    WHY    MERCHANTS    SHOULD    FURNISH    STATE- 
MENTS 

Thus  far  we  have  indicated  some  of  the  reasons  why 
it  is  advisable  for  selling  houses  to  obtain  statements 
from  credit  applicants  and  several  reasons  why  it  is 
desirable  to  obtain  these  statements  direct.  But  even 
to-day  many  debtors  do  not  take  kindly  to  the  cred- 
itor's request  for  a  copy  of  the  latest  financial  state- 
ment. These  debtors  regard  such  a  request  as  too  in- 
quisitorial in  nature.  Fortunately,  however,  the  num- 
ber of  such  debtors  is  comparatively  small  and  ever  de- 
creasing. Most  debtors,  being  conscious  of  the  exac- 
tions upon  the  credit  system  made  necessary  by  pres- 
ent day  business  conditions,  freely  issue  statements  to 
the  banks  and  merchandise  creditors.  Most  debtors 
realize  that  by  giving  a  statement  they  are  helping  to 
improve  their  own  credit  standing  (if  they  are  worthy 
of  credit)  and  are  assisting  in  strengthening  the  entire 
credit  system.  The  honest,  successful  debtor  knows, 
as  we  have  pointed  out  above,  that  the  statement  is  an 
effective  instrument  for  eliminating  the  competition 
of  fraudulent  and  incompetent  debtors.  Moreover,  the 
preparation  of  statements  by  a  debtor  enables  and  com- 
pels him  to  have  some  kind  of  an  accounting  system 


THE  FINANCIAL  STATEMENT        205 

and  to  look  into  his  financial  condition,  both  of  which 
unquestionably  result  in  some  benefits  to  the  debtor. 


RECIPROCAL  VALUE  OF  STATEMENT 

On  the  one  hand,  the  debtor  desires  to  obtain  credit 
as  a  means  of  increasing  his  business.  The  prudent 
man,  however,  will  seek  only  so  much  credit  as  the 
normal  healthful  expansion  of  his  business  will  permit. 
On  the  other  hand,  the  aim  of  the  credit  man  is  to  give 
a  fair  measure  of  credit.  The  interests,  then,  of  the 
good  trader  and  the  credit  man  are  not  in  conflict.  On 
the  contrary,  the  right-thinking  debtor  realizes  that  the 
credit  man  is  entitled  to  confidential  information  re- 
garding his  business  and  that  his  interests  are  best 
served  by  securing  the  confidence  and  co-operation  of 
the  enlightened  credit  man.  Both  realize  that  a  busi- 
ness is  more  jeopardized  when  it  receives  too  much 
than  when  it  receives  too  little  credit.  The  statement, 
presenting  most  concretely  the  financial  condition  of 
the  debtor,  is  indispensable  as  an  aid  to  the  determina- 
tion of  how  much  credit  can  be  safely  absorbed.  The 
credit  man,  who  wants  to  base  his  conclusions  as  much 
as  possible  on  facts,  should  have  this  information,  and 
the  debtor  who  wants  the  credit  man's  confidence  and 
co-operation  should  willingly  give  the  facts. 

Considering  the  benefit  the  debtor  obtains  through 
credit,  he  can  usually  offer  no  valid  objection  to  giving 
information  which  serves  as  a  basis  for  the  credit  man's 
proper  consideration.  The  intelligent  merchant  realizes 
that  a  request  for  a  statement  is  not  a  challenge  of  his 
good  faith,  but  simply  a  desire  on  the  part  of  the  credit 


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THE  FINANCIAL  STATEMENT        207 

man  to  judge  for  himself  how  well  the  capital  in  the 
business  is  protected  and  how  much  credit  can  be  safely 
given.  The  debtor  and  creditor  are  mutually  inter- 
ested. To  impress  these  facts  on  the  minds  of  all  mer- 
chants, the  National  Association  of  Credit  Men,  which 
has  been  a  powerful  force  in  quickening  beneficent 
education  in  credit,  has  prepared  a  statement  and  has 
had  it  printed  on  the  first  page  of  the  financial  state- 
ment blank  recommended  and  endorsed  by  the  Associa- 
tion.   The  statement  reads : 

"Good  credit  in  the  markets  of  the  world  enables 
every  merchant  to  add  to  his  ability  to  do  business.  It 
gives  him  the  use  of  enlarged  capital,  thus  enabling 
him  to  carry  a  more  complete  stock,  increase  his  sales, 
and  magnify  his  profits. 

"Large  assets  are  not  always  necessary  to  the  crea- 
tion of  credit;  what  is  most  desirable  is,  that  credit  be 
in  relative  proportion  to  the  actual  assets,  and  in  har- 
mony with  conditions  which  create  and  maintain  it. 
A  merchant's  capital  is  the  sum  of  his  net  available 
resources,  plus  his  credit.  The  giver  of  credit  is  a 
contributor  of  capital,  and  becomes,  in  a  certain  sense, 
a  partner  of  the  debtor,  and,  as  such,  has  a  perfect 
right  to  complete  information  of  the  debtor's  condition 
at  all  times. 

"Credit  is  given  a  merchant  because  of  the  confi- 
dence reposed  in  him.  Requesting  a  statement  when 
credit  is  asked  is  not  a  reflection  on  one's  character, 
honesty,  or  business  ability,  but  is  done  to  secure  in- 
formation to  enable  business  to  be  conducted  intelli- 
gently. 

"When  a  statement  is  made  it  shoidd  he  absolutely 
correct.     To  make  it  so  necessitates  the  taking  of  at 


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209 


2IO         CREDITS  AND  COLLECTIONS 

least  an  annual  inventory  and  the  keeping  of  an  ac- 
curate set  of  books.  Statement  giving,  therefore,  will 
tend  to  make  a  debtor  a  better  buyer,  because  more 
familiar  with  his  stock,  more  careful  in  giving  credit, 
more  conservative  in  incurring  debt,  and  will  result  in 
a  better  knowledge  of  his  business  generally. 

"A  merchant  who  desires  to  serve  his  own  best  in- 
terests should  recognise  that  his  most  valuable  posses- 
sion, apart  from  his  actual  assets,  is  a  sound,  substan- 
tial and  unquestioned  reputation  as  a  credit  risk,  and 
that,  under  the  prevailing  conditions  and  demands  of 
business,  the  most  efifective,  and  eminently  the  best  way 
to  prove  his  basis  for  credit,  is  to  be  willing  to  submit 
a  statement  of  his  financial  conditions. 

"Note  :  The  above  estimate  of  the  value  of  a  state- 
ment to  both  giver  and  receiver  is  the  embodiment  of 
the  thoughts  and  experiences  of  scores  of  the  leading 
credit  men  of  the  United  States,  who  are  members  of 
the  National  Association  of  Credit  Men,  and  who  thus 
desire  publicity  given  to  their  views  in  order  that  ther^ 
may  be  the  largest  benefits  to  both  retailer  and  whole' 
saler." 

PRACTICE  IN  OBTAINING  STATEMENTS 

As  was  stated  above,  there  are  two  methods  of  ob- 
taining financial  statements — the  direct  and  the  indi- 
rect. In  spite  of  the  advantages  accruing  to  both  cred- 
itor and  debtor  through  the  use  of  the  direct  method 
of  obtaining  statements  at  regular  intervals,  there  are 
comparatively  few  houses  that  follow  the  practice. 
Most  creditors  are  content  to  use  the  indirect  method, 
i.  e.,  to  rely  on  the  information  and  statements  obtained 
through  the  general  agencies  and  other  sources  hereto- 
fore described.     If  the  information  obtained  in  this 


THE  FINANCIAL  STATEMENT        211 

way  is  incomplete  or  unsatisfactory,  a  request  is  made 
for  a  statement  direct. 

Some  creditors  make  a  practice  of  calling  for  a 
statement  when  in  doubt  of  the  standing  of  the  debtor. 
When  this  practice  is  followed,  the  credit  man  either 
receives  information  which  enables  him  intelligently  to 
arrive  at  a  decision,  or  if  the  request  for  a  statement 
is  not  complied  with,  the  credit  man  is  in  a  position 
tactfully  to  turn  down  the  account.  The  debtor,  whose 
condition  is  seriously  weak,  will  usually  prefer  not  to 
expose  his  condition.  Likewise,  the  debtor  who  con- 
templates perpetrating  a  fraudulent  failure  will  hesi- 
tate to  issue  a  statement,  for  fear  of  prosecution  under 
the  false  statement  laws. 

On  the  other  hand,  many  houses,  especially  commis- 
sion houses  and  banks,  generally  require  statements 
from  new  credit  applicants;  and  some  creditors  even 
require  statements  from  most  of  their  debtors  at  regu- 
lar intervals,  for  example,  every  year.  This  practice, 
as  we  have  already  pointed  out,  is  the  ideal  one.  Then, 
too,  many  credit  men  believe,  in  addition  to  the  bene- 
fits we  have  described,  that  this  practice  has  a  beneficial 
moral  effect  on  the  debtor,  for  he  is  impressed  with 
the  carefulness  and  vigilance  of  those  creditors  re- 
questing the  statement,  and  as  a  result  he  will  try  to 
measure  up  to  higher  credit  standards. 


CHAPTER  XIII 
CONSTRUCTION  AND  ANALYSIS  OF  STATEMENT 

It  is  not  always  an  easy  matter  correctly  to  under- 
stand the  significance  of  the  figures  given  in  the  state- 
ment. This  is  due  largely  to  the  fact  that  a  wide  lati- 
tude obtains  in  the  preparation  of  statements.  The 
difficulty  of  judging  what  the  figures  mean  is  increased 
because  of  the  lack  of  uniformity  in  the  statement 
forms  used.  This  idea  will  be  more  readily  grasped 
when  it  is  understood  that  the  figures  really  represent 
only  estimates.  The  actual  value  of  the  assets  is  not 
ascertainable  until  the  assets  are  converted  into  cash. 

Thus  while  correct  accountancy  and  sound  business 
principles  provide  good  rules  for  valuing  the  assets,  the 
appraisal  will  be  colored  by  the  optimism  or  conserv- 
atism of  the  maker  of  the  statement.  Moreover,  even 
though  honestly  made,  the  appraisals  are  susceptible  to 
errors  of  judgment.  To  narrow  these  influences  as 
much  as  possible,  the  terms  in  the  statement  form 
should  be  well  defined  and  clearly  understood. 

The  amount  given  in  the  statement  as  the  worth  of 
any  one  asset  may  be  constituted  of  several  elements. 
In  order  that  the  reader  of  the  statement  can  form  his 
own  opinion  as  to  its  value,  it  is  essential  that  he  under- 
stand the  composition  of  each  item.  What  Is  the  com- 
position of  each  item  is  described  in  the  description  and 

212 


ANALYSIS  OF  STATEMENT  213 

valuation  of  assets  and  liabilities  found  on  the  fol- 
lowing pages.  The  analysis  of  assets  will  also  in  a 
general  way  illustrate  how  the  valuation  of  assets 
should  properly  be  made.  Moreover,  the  analysis  will 
point  out  the  elements  and  conditions  which  must  be 
considered  in  order  to  minimize  the  effects  of  the 
factors  which  tend  to  create  a  wrong  impression  or  to 
mislead  the  credit  man. 

The  discussion  will  incidentally  call  the  reader's 
attention  to  the  great  need  for  standard  statement 
forms.  The  statement  form  given  on  the  following 
pages  is  an  adaption  of  the  standard  forms  recom- 
mended by  the  National  Association  of  Credit  Men.  It 
may,  of  course,  be  changed  to  suit  the  requirements  of 
any  particular  line  of  business, 

SUGGESTED   FORM   OF   FINANCIAL  STATEMENT   FOR 
CORPORATIONS 

Statement   of 

(Name  of  credit  applicant.) 

Business Address , 

To  (Name  of  Creditor) 


For  the  purpose  of  obtaining  credit  nOw  and  here- 
after for  goods  purchased,  we  herewith  submit  to  you 
the  following  statement  of  our  resources  and  liabili- 
ties, and  we  will  immediately  notify  you  of  any  ma- 
terial change  in  our  financial  condition,  and  in  the  ab- 
sence of  such  notice  or  of  a  new  and  full  written  state- 
ment this  may  be  considered  as  a  continuing  statement 
and  substantially  correct;  and  it  is  hereby  expressly 
agreed  that  upon  application  for  further  credit,  this 
statement  shall  have  the  same  force  and  effect  as  if 


214         CREDITS  AND  COLLECTIONS 

delivered  as  an  original  statement  of  our  financial  con- 
dition at  the  time  such  further  credit  is  requested. 

In  consideration  of  your  granting  credit  to  the  un- 
dersigned, we  agree  that  in  case  of  our  failure  or  in- 
solvency, or  in  case  we  shall  make  any  assignment  for 
the  benefit  of  creditors,  bill  of  sale,  mortgage  or  other 
transfer  of  our  property,  or  shall  have  stock  attached, 
receiver  appointed,  or  should  any  judgment  be  entered 
against  us,  then  all  and  every  one  of  the  claims  which 
you  may  have  against  us  shall  at  your  option  become 
immediately  due  or  payable,  even  though  the  term  of 
credit  has  not  expired.  All  goods  hereafter  purchased 
from  you  shall  be  taken  to  be  purchased  subject  to  the 
foregoing  conditions  as  part  of  the  terms  of  sale. 

Assets 

Cash  on  Hand 

Cash  in  Banks 

Accounts  Receivable  of  Customers 

Notes  Receivable  of  Customers 

Accounts  and  Notes  Receivable  of 

Officers,  Salesmen  &  Others 

Merchandise  Finished 

Merchandise  in  Process , 

Raw  Material  and  Supplies , 

Other  Quick  Assets  (Itemize) 

Total  Quick  Assets 

Land  and  Buildings  Owned  by 

Corporation  Used  for  This  Business 

Machinery , -. . 

Furniture  &  Fixtures 

Other  Assets  (Itemize) 

Total  Assets 


ANALYSIS  OF  STATEMENT  21, 

Liahilitics 

Accounts    Payable 

Notes  Payable  given  for  merchandise 

Notes  Payable  given  to  banks 

Notes  Payable  to  others 

Deposits  of  money  with  us 

Other  Current  Liabilities  (Itemize) 


Total  Current  Liabilities . 

Bonded    Debt 

Mortgage    Debt.  .  .  ., 

Chattel  Mortgages 

Other  Liabilities  (Itemize) .  .  . 


Total  LiabiHties. 
Reserves    ,.  .  .  , 

Total    

Capital  Stock 

Surplus    

Total    


Officers 
Name  in  full  Address 

President 

Vice-President    . .  . 

Secretary  

Treasurer    


Directors 
Name  in  full  Address 


2i6         CREDITS  AND  COLLECTIONS 

Buy  Principally  from  Following  Houses 

What  line  of 
Name  Address  Business 


"Questionnaire" 

(a)  Accounts  and  Notes  Receivable.     If  any  are  past 

due,    doubtful   or   uncollectable,    state    amount 
and   circumstances 

(b)  If  any  amounts  are  due  from  directors,  officers, 

salesmen,    employees,    branches,    state   amount 
and   circumstances 

(c)  Investments Itemize 

(d)  Insurance.    Fire,  on  Buildings  $ 

Plant  and  Machinery  $ Mer- 
chandise $ Life,  in  favor  of  the 

company  $. 

(e)  Accounts  and  Notes  Payable.     State  amount  past 

due  $ 

(f)  Mortgages  and  Bonds.    Due  date  and  on  what  as- 

sets a  lien 

(g)  Contingent  Liability.        As  guarantor  or  surety 

$ as  indorser  $ Other 

contingent  liabilities  $ 

(h)    Net  Sales  $ (i)   Expenses  $ 

( j )  Net  Profits  $ 

(k)    Dividends  Paid  $ 

(1)  When  was  last  dividend  declared 

(m)   Rate 

(n)   In  what  State  incorporated? 


ANALYSIS  OF  STATEMENT  217 

Authorized  Stock  $ Subscribed 

$ Paid  in  Cash  $ paid 

in  other  property  $ 

(o)   Are  any  merchandise  creditors  secured? 

(p)    Suits  pending  and  of  what  nature? 

(q)   Is  the  statement  based  on  actual  inventory? 

Date  of  inventory.  ., 

(r)    Keep  the  following  books  of  account 

(s)    Bank  account  kept  with 

(t)  HAVE  YOU  PLEDGED  OR  ASSIGNED  ANY 
OF  THE  ABOVE  ACCOUNTS  RECEIV- 
ABLE OF  CUSTOMERS? 

OUR     ASSIGNED     ACCOUNTS     RECEIV- 
ABLE AMOUNT  TO  $ 

The  above  statement,  both  printed  and  written,  has 
been  carefully  read  by  the  undersigned,  and  is  a  full 
and   correct  statement  of  our  financial  condition  as 

of 19 

Signed  this                 day  of                               ,  19     . 
Name 

By   ; 

(state  official  title) 
End  of  Form. 


DESCRIPTION  AND  VALUATION  OF  ASSETS  AND 
LIABILITIES 

Cash.  This  item  should  represent  the  sum  of  cash 
on  hand  and  in  bank  immediately  available.  It  should 
not  include,  as  it  sometimes  does  erroneously,  I.  O. 
U.'s,  which  may  or  may  not  be  collectable,  balances  in 
the  hands  of  salesmen  to  be  used  for  expenses,  or  funds 
against  which  liens  have  been  filed,  or  which  in  any 


2i8         CREDITS  AND  COLLECTIONS 

way  are  tied  up  and  not  at  the  immediate  disposal  of 
the  business  for  debt-paying  purposes. 

It  is  advisable  to  have  the  cash  on  hand  and  cash  in 
bank  stated  separately.  If  the  cash  on  hand  seems  out 
of  proportion,  the  inference  may  reasonably  be  drawn 
that  the  item  includes  I.  O.  U.'s,  unexpended  sales- 
men's balances,  etc.  If  properly  stated,  the  cash  on 
hand  includes  only  the  cash  actually  in  the  drawer; 
and  the  cash  in  the  bank  only  so  much  as  is  not  subject 
to  any  encumbrances,  and  should,  of  course,  be  loofo 
good  and  available  for  debt-paying  purposes.  In  this 
connection  it  should  be  remembered  that,  if  the  mer- 
chant is  indebted  to  the  bank  in  which  he  deposits,  the 
bank  has  a  lien  against  the  deposit  to  the  extent  of  the 
loan. 

Accounts  Receivable.  This  should  represent  unpaid 
charges  against  solvent  debtors,  ordinarily  for  goods 
sold  and  delivered.  Properly  to  express  the  net  worth 
of  this  account  a  reserve  should  be  created  to  pro- 
vide for  deductions,  allowances,  discounts,  collection 
charges,  returns,  and  bad  debts. 

The  following  should  be  excluded : — 

(i)   Items  reasonably  known  to  be  uncollectable. 

(2)  Balances  covering  goods  shipped  on  consign- 
ment. 

(3)  Advances  to  salesmen. 

(4)  Loans  to  officers. 

(5)  Overdrafts  of  partners.  These  are  really  with- 
drawals of  capital,  reducing  the  investment. 

(6)  Advances  to  subsidiary  companies,  which  rep- 
resent more  or  less  permanent  investments  and  will  not 


ANALYSIS  OF  STATEMENT  219 

be  coHected  from  the  subsidiaries  in  the  ordinary- 
course  of  business. 

After  cash,  the  accounts  receivable  item  is  the  most 
live  asset  in  the  business  of  a  manufacturer  or  jobber. 
It  is  to  the  total  of  cash  plus  accounts  receivable 
that  the  credit  man  looks  when  trying  to  determine  the 
ability  of  debtors  promptly  to  meet  their  obligations. 
Therefore,  the  amount  stated  as  accounts  receivable 
should  include  only  unpaid  charges  which  information 
and  past  experience  indicate  will  be  paid  when  due  or 
within  a  reasonable  time.  That  is  to  say,  the  accounts 
receivable  should  include  only  those  accounts  which 
can  be  relied  upon  for  payment  of  creditors'  claims. 
They  should  not  include  any  bookkeeping  balances 
which  are  not  to  be  collected  in  the  usual  course  of 
business  and  which  will  not  yield  funds  for  the  pay- 
ment of  debts.  For  this  reason  the  ideal  statement 
segregates  the  good  "accounts  receivable"  for  mer- 
chandise sold  from  all  other  accounts. 

In  trying  to  determine  the  quality  of  the  accounts 
receivable  found  in  a  credit  applicant's  statement,  the 
credit  man  may  apply  the  following  tests : 

(a)  Are  the  accounts  in  fair  proportion  to  the  sales? 
To  answer  this  fairly,  one  must  consider  whether  the 
commodity  is  sold  quite  uniformly  over  the  year,  or 
seasonally.  In  the  latter  event,  regard  must  be  had  for 
the  date  of  the  financial  statement.  If  the  accounts 
seem  to  be  disproportionately  large,  the  probabilities 
are  that  old  doubtful  accounts  are  included  and  that 
credit  has  been  granted  indiscriminately.  This  is  es- 
pecially true  in  the  case  of  a  retailer.  Or  possibly  no 
provision  for  trade  discounts  has  been  made,  or  ac- 


220         CREDITS  AND  COLLECTIONS 

counts  receivable  from  officers  or  salesmen  may  be 
included. 

(b)  Is  a  large  proportion  of  the  accounts  jeopar- 
dized by  regional  or  local  conditions,  for  example, 
such  conditions  as  the  sudden  decline  of  cotton  values 
in  the  fall  of  1914,  which  severely  depressed  industry 
in  the  South,  or  economic  disturbances  such  as  strikes, 
which  would  injuriously  affect  the  collectibility  of  ac- 
counts receivable  in  those  sections? 

Assuming  that  only  balances  due  from  solvent  cus- 
tomers are  included,  the  credit  custom  of  the  trade,  as 
well  as  the  credit  policy  of  the  house,  must  be  consid- 
ered in  determining  the  value  of  the  accounts  receiv- 
able. In  some  lines  of  business  the  accounts  can  be 
looked  upon  as  automatically  convertible,  that  is,  cash 
is  received  for  most  of  the  accounts  without  entailing 
much  effort  and  expense.  Among  dry  goods  whole- 
salers and  manufacturers,  the  percentage  of  bad  debt 
losses  varies  from  less  than  a  fraction  of  one  per  cent 
to  five  per  cent.  Where  a  careful  credit  policy  is  pur- 
sued, the  result  should  be  close  to  the  first  figure.  In 
industries  where  the  profits  are  large  the  inclination  is 
to  take  greater  risks  and  a  much  larger  percentage  of 
losses  must  be  expected. 

Notes  Receivable.  This  account  should  include  ne- 
gotiable promissory  notes  received  from  customers  in 
payment  for  goods  sold  and  delivered.  It  should  not 
include  notes  from  partners,  officers,  stockholders,  em- 
ployees, controlled  or  allied  companies,  or  any  other 
similar  notes.  For  the  same  reasons  that  were  urged 
in  the  discussion  of  the  accounts  receivable,  these  items 
should  be  differentiated  from  customers'  indebtedness 


ANALYSIS  OF  STATEMENT  221 

and  separately  stated.  Nor  should  instruments  which 
have  been  discounted,  assigned  or  transferred  be  in- 
cluded. 

The  availability  of  this  asset  for  debt-paying"  pur- 
poses depends  upon  the  nature  of  the  business.  In 
some  lines  of  business  it  is  the  custom  for  concerns  of 
even  the  highest  standing  to  give  notes  to  cover  pur- 
chases. In  such  instances,  in  estimating  the  value  of 
the  notes  the  credit  man  should  deduct  an  amount  for 
bad  debts  based  upon  the  average  percentage  of  losses 
usual  to  the  trade  and  upon  the  credit  methods  of  the 
debtor. 

In  most  lines  of  business,  however,  debts  are  usually 
evidenced  only  by  open  book  accounts.  Where  this 
system  prevails  the  closing  of  an  account  by  note  indi- 
cates, as  a  rule,  past  due  indebtedness,  and  if  the 
amount  is  a  substantial  one  it  is  indicative  of  laxness 
in  the  extending  of  credit  and  of  making  collections. 

With  the  development  of  the  Federal  Reserve  Sys- 
tem, however,  it  is  to  be  expected  that  "trade  ac- 
ceptances" will  replace  to  a  certain  extent  both  notes 
and  accounts  receivable.  The  "trade  acceptances" 
should  be  valued  in  the  same  way  accounts  receivable 
have  been  valued.  In  fact  even  a  higher  valuation 
might  be  placed  on  the  "trade  acceptances,"  for  they 
should  prove  easier  to  collect,  all  other  things  being 
equal,  than  the  open  accounts  receivable. 

Oncers,  Salesmen  and  Others.  Only  such  part  of 
the  amount  as  the  credit  man  is  assured  can  be  col- 
lected upon  demand  may  be  considered.  If  the  item 
is  relatively  a  substantial  one  it  will  bear  investigation, 
inasmuch  as  it  is  often  an  index  to  adverse  conditions. 


,-222         CREDITS  AND  COLLECTIONS 

Generally,  however,  this  amount  should  be  given  very 
little  weight  as  an  asset  available  for  the  payment  of 
debts. 

Merchandise.  This  account  refers  to  goods,  wares, 
materials,  products  and  supplies  of  the  retailer,  whole- 
saler or  manufacturer — that  is,  finished  goods,  goods 
in  process  and  raw  materials  and  supplies  owned  by  the 
one  who  submits  the  statement  and  which  are  to  be 
sold  in  the  ordinary  course  of  trade.  This  amount 
should  not  include  any  part  of  the  stock  which  has 
been  pledged  as  security  or  which  is  subject  to  any 
liens. 

In  appraising  the  worth  of  this  asset  it  is  necessary 
to  consider  what  methods  the  maker  of  the  statement 
employed  in  taking  inventory. 

First,  how  is  the  quantity  of  the  stock  of  merchan- 
dise ascertained?  Is  it  the  result  of  a  physical  stock- 
raising,  as  it  should  be,  or  does  it  represent  book  (esti- 
mated) inventory,  or  is  it  simply  a  guess?  If  the  fig- 
ures in  the  financial  statement  are  given  in  round  num- 
bers, the  conclusion  may  reasonably  be  drawn  that  the 
inventory  has  probably  been  a  mere  guess. 

Second,  how  is  the  merchandise  valued?  Various 
methods  are  employed  in  valuing  the  merchandise. 
Some  houses  inventory  their  merchandise  at  selling 
price.  Unless  the  goods  have  actually  been  sold  so 
that  the  title  has  passed  and  the  amount  is  a  proper 
charge  against  the  customer,  this  mode  is  manifestly 
wrong.  It  overlooks  the  expenses  chargeable  against 
a  sale  and  also  appropriates  problematical  profits  which, 
even  if  later  made,  properly  belong  to  the  subsequent 
period  when  the  sale  is  effected. 


ANALYSIS  OF  STATEMENT  223 

The  question  then  arises :  Should  the  inventory  be 
taken  at  cost  or  at  the  prevailing  market  price?  The 
more  conservative  practice  is  to  use  the  lower  figure 
of  the  two.  This  is  based  on  the  theory  that  even  if 
the  cost  of  the  goods  is  less  than  the  current  market 
price,  no  profit  is  actually  made  until  the  goods  are 
sold,  while  if  the  market  price  is  lower  there  is  usu- 
ally a  corresponding  decline  in  realizable  value,  and 
conservative  stock-taking  would  place  the  inventory 
figure  low  enough  so  that  the  selling  price  may  yield 
the  normal  gross  profit.  In  this  connection  it  is  well 
to  consider  whether  cost  records  have  been  used  in 
arriving  at  the  inventory  valuation,  for  only  with  the 
proper  cost  records  can  the  correctness  of  the  calcula- 
tion be  insured.  Many  merchants  have  suffered  dis- 
astrous surprises  owing  to  the  misguidance  of  poor 
cost  records. 

Third,  in  what  condition  is  the  stock?  How  much 
is  raw  material?  How  much  is  finished  goods?  How 
much  is  goods  in  process  ? 

The  more  nearly  the  merchandise  is  in  the  shape  of 
raw  material,  the  more  likely  the  goods  will  prove  to 
be  of  full  value  in  case  of  forced  sale.  This  is  ac- 
counted for  by  the  fact  that  changes  in  style  seldom 
affect  raw  materials  so  as  to  make  them  worthless. 
Moreover,  raw  material,  in  the  event  of  insolvency 
of  the  debtor,  may  readily  be  converted  into  cash.  On 
the  other  hand,  merchandise  in  process  is  worth  com- 
paratively little,  for  even  when  the  parts  can  be  utilized, 
much  labor  and  time  must  be  spent  on  it  to  put  it  in 
saleable  condition.  However,  the  finished  goods  may 
more  readily  be  sold. 


224         CREDITS  AND  COLLECTIONS 

In  analyzing  the  statement  of  a  going  concern,  to 
ascertain  what  assets  are  available  for  current  debt 
paying,  the  credit  man  should  count  upon  only  so  much 
of  the  merchandise  as  will  probably  be  sold  within  a 
reasonable  time  in  the  ordinary  course  of  trade.  Of 
course  it  must  be  remembered  that,  while  in  ordinary 
course  of  business  merchandise  is  sold  at  a  profit,  the 
stock  is  subject  to  depreciation.  Moreover,  time,  ef- 
fort and  expense  are  required  to  convert  it  into  cash. 
Then,  too,  the  stock  is  usually  first  converted  into  ac- 
counts receivable.  To  check  up  the  accuracy  of  the 
inventories  given  in  the  statement  and  to  determine 
whether  they  are  too  large,  the  credit  man  might  apply 
the  following  tests : 

First,  does  the  stock,  in  view  of  the  nature  and  loca- 
tion of  the  business  and  the  time  of  inventory,  seem 
out  of  proportion  in  relation  to  the  annual  sales?  If 
so,  usually  either  the  inventories  are  overstated  or  a 
good  part  of  the  merchandise  is  an  accumulation  of 
unsaleable  goods.  Second,  has  sufficient  deduction 
been  made  or  a  reserve  provided  for  physical  deteriora- 
tion, changes  of  style  and  fashions,  mistakes  in  buying, 
or  decline  in  value  for  any  reason? 

Deferred  Assets.  This  includes  such  items  as  unex- 
pired insurance  premiums,  taxes  and  interest  paid  in 
advance,  and  other  charges  properly  applicable  to  a 
subsequent  period.  While  these  items  are  not  to  be 
converted  into  cash  in  the  usual  course  of  business,  and 
are,  therefore,  not  available  for  the  payment  of  debts, 
nevertheless,  their  presence  in  the  statement  is  of  some 
value,  as  it  indicates  to  the  credit  man  whether  the 


ANALYSIS  OF  STATEMENT  225 

maker  of  the  statement  has  a  comprehensive  system  of 
keeping  accounts. 

Plant,  Machinery  and  Tools.  This  account  should 
represent  only  the  above-mentioned  properties  owned 
by  the  business  in  determining  their  value.  Further- 
more, it  should  be  seen  whether  or  not  they  are  sub- 
ject to  any  mortgages  or  liens ;  it  must  be  noted 
whether  or  not  there  has  been  a  sufficient  amount  writ- 
ten off  or  reserve  provided  to  cover  depreciation,  as  a 
result  of  wear  and  tear,  and  obsolescence,  due  to  the 
superior  efficiency  of  newly  invented  machinery  and 
appliances.  There  should,  of  course,  be  a  sufficient 
reserve  to  replace  machinery  and  maintain  the  efficiency 
of  the  plant. 

These  assets  and  the  ones  following,  all  of  which 
are  often  referred  to  as  fixed  assets,  are  not  to  be  sold 
in  the  usual  course  of  business,  and  therefore  con- 
tribute very  little,  directly,  to  the  ability  of  the  busi- 
ness to  meet  currently  maturing  obligations.  On  the 
other  hand,  their  presence  does  add  to  the  stability  of 
the  business,  and  in  the  event  of  a  final  liquidation  of 
the  business,  they  could  be  counted  on  to  realize  some- 
thing, although  probably  not  more  than  from  ten  to 
fifty  per  cent  of  their  book  value,  for  the  payment  of 
creditors.  For  this  reason  only  the  current  assets,  i.  e., 
cash,  accounts  receivable,  and  a  part  of  the  merchan- 
dise, are  to  be  considered  for  the  probability  of  prompt 
payment  of  debts,  and  fixed  assets  are  to  be  considered 
only  as  a  possible  source  of  ultimate  payment. 

Furniture  and  Fixtures.  In  determining  the  value 
of  this  item,  it  should  be  seen  whether  a  sufficient  re- 
serve for  depreciation  has  been  provided,  and,  further, 


226         CREDITS  AND  COLLECTIONS 

whether  the  size  of  investment  is  consistent  with  the 
requirements,  considering  the  nature  of  the  business. 

Real  Estate.  This  account  should  represent  the 
value  of  land  and  buildings  owned  and  used  in  the 
operation  of  the  business.  The  amount  invested  in 
each  parcel  should  be  separately  shown  at  the  cost 
price.  This  amount  should  be  compared  with  the  as- 
sessed valuation.  It  should  then  be  noted  whether 
adequate  depreciation  is  provided  and  whether  there 
have  been  any  fluctuations  in  the  market  value  due  to 
changes  in  the  neighborhood  or  to  the  nature  of  the 
construction  of  the  building. 

Intangible  Assets.  Under  this  heading  may  be 
grouped  such  items  as  copyrights,  patents,  contracts, 
good  will,  and  franchises.  They  can  only  be  realized 
on  in  a  sale  of  the  business  and  then  usually  only  when 
as  a  part  of  the  investment  they  are  yielding  satis- 
factory returns.  To  a  going  concern  they  are  not  re- 
sources available  for  debt  paying,  and  to  an  insolvent 
concern  they  are  usually  worthless. 

LIABILITIES 

Accounts  payable  should  represent  the  total  amount 
owing  to  creditors  on  open  account,  whether  due  or 
not,  for  merchandise,  wares  and  supplies  purchased. 
The  amount  is  not  very  apt  to  be  understated,  for  it  is 
easily  verified  by  the  creditors,  especially  in  case  of  the 
bankruptcy  of  the  debtor.  A  division  of  the  item 
should  be  made,  showing  the  amounts  (i)  not  due 
and  (2)  past  due. 

Notes  payable  may  be  segregated  into  three  groups : 


ANALYSIS  OF  STATEMENT  227 

( I )  The  amount  owing  on  notes  to  merchandise  cred- 
itors for  suppHes  purchased.  (2)  Notes  payable  to 
banks.  This  represents  money  borrowed  from  the 
banks  by  discounting  the  debtor's  own  notes.  Good 
banking  accommodations  usually  denote  strength.  (3) 
Notes  payable  to  others.  This  represents  notes  given 
when  a  loan  is  obtained  or  other  obligation  incurred 
from  sources  other  than  the  first  two  mentioned. 
Usually  these  are  debts  payable  to  officers  of  a  cor- 
poration or  to  the  relatives  or  friends  of  an  individual 
merchant.  Their  presence  in  the  financial  statement 
is  usually  a  signal  for  the  exercise  of  caution  on  the 
part  of  the  credit  man.  In  the  first  place,  the  fact 
that  a  merchant  has  to  borrow  from  friends  and  rela- 
tives probably  indicates  his  credit  at  the  bank  is  not 
good  or  is  used  up.  In  the  second  place,  in  case  the 
merchant  becomes  embarrassed  he  will  look  out  for 
his  friends  and  relatives  first,  and  in  this  respect  "debts 
due  others"  is  usually  an  item  which  warns  a  credit 
man  to  be  cautious. 

Deposits  should  include  funds  deposited  with  the 
debtor  as  a  saving  feature,  and  also  trust  funds,  but 
should  not  include  loans  obtained. 

Accrued  liabilities  represent  the  amounts  of  wages, 
rent,  taxes  and  similar  items  accrued  on  date  of  the 
statement,  but  not  payable  until  a  later  date. 

Bonded  indebtedness  is  a  liability  represented  by 
bonds,  usually  payable  at  some  distant  future  time,  and 
usually  secured  by  a  mortgage  on  the  real  or  personal 
property  or  both. 

Mortgages  represent  indebtedness  secured  by  a 
pledge  of  real  estate.    The  mortgage  liability  may  have 


228         CREDITS  AND  COLLECTIONS 

been  assumed  as  part  payment  for  the  property  when 
title  was  acquired,  or  the  mortgage  may  have  been  exe- 
cuted subsequently  as  security  for  a  loan  obtained. 
Property  covered  by  a  mortgage  of  any  considerable 
size  is  usually  worthless  as  far  as  creditors  are  con- 
cerned. 

Reserves  usually  represent  the  estimated  deprecia- 
tion of  one  or  more  of  the  assets  on  the  asset  side  of 
the  balance  sheet.  To  determine  the  estimated  value 
of  the  asset,  the  amount  of  the  reserve  should  be  de- 
ducted from  the  amount  of  the  asset. 

Reserves  may  also  be  a  part  of  the  capital  or  surplus 
set  aside  for  some  particular  purpose.  In  such  a  case 
the  name  of  the  reserve  in  the  financial  statement  would 
usually  indicate  its  purpose. 

Capital,  in  the  statement  of  an  individual  or  firm, 
represents  the  book  net  worth  of  the  business,  or  the 
investment  of  the  owner  in  the  business. 

Capital  stocky  in  the  statement  of  a  corporation  or 
joint  stock  company,  is  usually  the  face  value  of  stock 
outstanding.  Sometimes,  however,  it  is  the  face 
amount  of  all  the  stock  authorized,  even  though  some 
of  the  stock  has  not  yet  been  issued.  Or  it  might  rep- 
resent the  total  which  had  been  issued  even  if  some 
was  returned  to  the  corporation.  In  such  a  case  there 
would  probably  appear  on  the  asset  side  of  the  balance 
sheet  an  item  called  "Treasury  Stock."  The  treasury 
stock,  from  the  credit  man's  viewpoint,  can  hardly  be 
considered  an  asset,  for  in  the  ordinary  course  of  busi- 
ness it  would  not  be  converted  into  cash  available  for 
payment  of  debts.  Moreover,  in  case  of  insolvency, 
the  treasury  stock  is  worth  nothing. 


ANALYSIS  OF  STATEMENT  229 

The  outstanding  capital  stock  represents  merely  the 
original  investment  of  the  stockholders  (the  owners) 
in  the  business.  It  is  not  a  liability  any  more  than 
the  amount  originally  invested  by  an  individual  in  his 
ov^n  business  is  a  liability  of  the  business. 

Surplus  is  merely  a  nominal  account  which  repre- 
sents the  excess  of  the  total  assets  over  the  total  of 
liabilities  plus  reserves  plus  capital  stock.  The  surplus 
plus  the  capital  stock  of  a  corporation  represents  its 
net  worth  as  shown  by  the  books.  The  existence  of  a 
surplus  usually  indicates  that  the  corporation  has  at 
some  time  made  profits  from  the  operations  of  its  busi- 
ness. However,  it  must  be  remembered  that  when  a 
surplus  exists,  dividends  may  be  declared  and  paid  on 
the  capital  stock.  A  cash  payment  of  the  dividends, 
unless  the  concern  is  in  good  liquid  condition,  may 
waste  or  impair  its  working  capital.  Where,  however, 
the  surplus  is  divided  into  two  items,  such  as  "surplus" 
and  "capital  surplus,"  the  intention  is  that  dividends 
may  be  paid  only  to  the  amount  of  the  "surplus."  The 
"capital  surplus"  is  appropriated  to  the  business  and 
is  not  available  for  dividend  distribution. 

CREDIT   CAPACITY  OF  THE  BUSINESS 

If  the  assets  are  properly  valued  the  surplus  of  the 
total  real  assets  over  the  total  liabilities  equals  the 
capital  or  net  worth  of  the  business.  This  capital, 
however,  does  not  represent  the  credit  capacity  of  the 
business.  Credit  strength  is  the  power  to  discharge 
obligations.  This  power  depends  not  upon  the  amount 
of  the  capital  but  rather  upon  the  form  in  which  it  is 


230         CREDITS  AND  COLLECTIONS 

distributed  among  the  assets.  A  concern,  to  maintain 
a  good  credit  standing,  must  be  prepared  to  meet  its 
obligations  promptly  or  reasonably  so,  while  contin- 
uing as  a  going  concern.  To  do  this  it  must  have  a 
sufficient  amount  of  its  assets  in  liquid  form  or  avail- 
able to  take  care  of  maturing  liabilities  as  they  become 
due.  It  is,  therefore,  not  the  amount  of  its  capital  but 
the  availability  of  its  assets  which  indicates  the  credit 
capacity  of  the  business.  That  is  to  say,  it  is  the  liquid- 
ity of  condition  of  a  business  which  offers  a  measure 
of  the  ability  of  the  business  to  absorb  credit.  The 
liquidity  of  the  condition  of  a  business  is  determined 
by  the  ratio  of  current  assets  to  current  liabilities. 
Current  assets  consist  of  such  items  as  will  in  the  usual 
course  of  business  be  converted  into  cash  within  a 
reasonably  short  time  and  without  injuring  the  future 
operations  of  the  business.  Current  liabilities  consist 
of  short  term  obligations.  The  long  term  liabilities 
create  current  or  quick  liabilities  to  the  extent  of  the 
interest  which  must  be  paid  on  the  long  term  obliga- 
tions. 

In  analyzing  a  statement  from  the  credit  man's 
standpoint,  it  is  necessary  to  set  off  the  current  assets, 
on  the  one  hand,  against  the  current  liabilities  on  the 
other.  There  must  be  reasonable  certainty  that  the 
amount  of  assets  convertible  into  cash  in  the  ordinary 
course  of  business  will  be  sufficient  to  enable  the  busi- 
ness to  meet  its  obligations.  To  determine  this,  one 
must  consider  the  nature  and  volume  of  the  business, 
and  also  the  terms  of  purchase  and  sale.  Furthermore, 
in  calculating  the  amount  of  current  assets  available 
for  debt-paying,  deduction  must  first  be  made  to  pro- 


ANALYSIS  OF  STATEMENT  231 

vide  for  the  funds  required  for  current  expenses,  such 
as,  pay-roll,  rent,  and  other  similar  running  cash  ex- 
penses, not  listed  among"  the  obligations  in  the  balance 
sheet.  If,  after  allowance  has  been  made  for  these 
current  expenses,  the  amount  of  current  assets  remain- 
ing appears  adequate  to  pay  off  all  current  liabilities, 
the  business  is  in  liquid  condition.  It  is  well,  however, 
to  inquire  into  the  relative  proportion  of  each  class 
of  the  assets,  and  also  into  the  nature  of  the  liabilities. 
We  know  that  the  liabilities  represent  100%  of  un- 
shrinkable obligations.  How  dependable  are  the  cur- 
rent assets?  The  items  cash,  receivables,  and  mer- 
chandise, should  be  compared  with  similar  items  in  the 
statements  of  the  most  successful  concerns  engaged  in 
the  same  line  of  business,  having  in  mind  whether  the 
operations  are  conducted  under  the  same  policies.  If 
an  item  seems  to  be  out  of  normal  proportion  it  should 
be  further  investigated.  If  the  amount  of  merchan- 
dise, in  comparison  with  other  assets  and  in  compari- 
son with  the  amount  found  in  the  statements  of  suc- 
cessful similar  concerns,  seems  excessive,  it  usually  in- 
dicates an  accumulation  of  inferior,  stale  or  unsale- 
able stock  or  an  overvaluation  of  the  stock.  If,  in  the 
same  way,  the  accounts  receivable  seem  too  large,  there 
is  probably  included  an  accumulation  of  old  and  un- 
collectible accounts.  In  either  of  these  events,  the 
figures  are  not  correctly  stated  and  should  be  dis- 
counted by  the  credit  man.  Moreover,  the  fact  that 
they  are  excessively  large  reflects  poor  buying  and 
poor  credit  judgment. 

In  connection  with  the  liabilities  it  is  well  to  note 
how  the  merchandise  indebtedness  compares  with  the 


232         CREDITS  AND  COLLECTIONS 

amount  of  merchandise  and  receivables.  Furthermore, 
it  is  well  to  observe  whether  banks  or  note  brokers 
or  both  are  used  for  borrowing  purposes.  In  any 
case  it  should  be  ascertained  whether  merchandise  ac- 
counts are  discounted  or  whether  the  business  depends 
upon  borrowed  funds  for  permanent  working  capital. 
In  this  latter  event  the  business  would  probably  be  in 
an  extended  condition. 


WORKING   CAPITAL 

If  the  current  assets  exceed  the  current  liabilities 
the  excess  is  the  working  capital.  The  working  cap- 
ital is  the  index  to  the  condition  of  liquidity  and  credit 
capacity  of  the  business.  The  fixed  assets  serve  as  a 
secondary  source  to  fortify  the  power  to  pay.  How- 
ever, they  are  not  ordinarily  available  for  paying  debts 
in  the  usual  course  of  business.  Thus  we  find  that 
while  fixed  assets  are  potentially  realizable,  they  are 
in  fact  unrealizable  as  long  as  the  business  is  a  going 
enterprise.  For  this  reason  the  credit  man  should  give 
fixed  assets  serious  consideration  only  in  reckoning 
whether,  if  for  unforeseen  reasons  the  liquidation  of 
the  business  became  necessary,  the  ultimate  collection 
of  the  debt  would  be  possible. 

FLOATING   DEBT 

If  the  total  current  liabilities  exceed  the  current 
assets  the  difference  is  floating  debt.  This  indicates 
insufficiency  of  working  capital  and  denotes  a  top- 
heavy  condition.    This  is  usually  a  menace  to  the  busi- 


ANALYSIS  OF  STATEMENT  233 

ness  and  often  an  omen  of  failure.  Lack  of  working 
capital  impairs  the  efficiency  of  a  business,  and  while 
a  man  of  good  qualities  would  make  more  determined 
efforts,  the  load  may  be  too  much  for  any  one  to 
sustain. 

In  analyzing  a  statement  showing  a  floating  debt 
or  even  insufficient  working  capital  it  is  well  to  con- 
sider whether  too  much  capital  has  not  been  tied  up 
in  fixed  assets,  such  as  real  estate,  machinery,  etc. 
Thus,  a  top-heavy  condition  becomes  further  aggra- 
vated by  the  necessity  for  having  an  increased  amount 
of  working  capital  to  maintain  or  operate  the  fixed 
assets.  Then,  too,  a  top-heavy  condition  may  be  due 
to  the  diversion  of  too  much  capital  from  the  business 
into  outside  investments. 

COLLATERAL   INFORMATION 

The  data  called  for  in  the  questionnaire  supplement- 
ing the  Financial  Statement,  usually  provides  valuable 
information  for  checking  the  condition  purported  to  be 
shown  in  the  statement.  The  questions  will  be  dis- 
cussed in  the  order  followed  in  the  form  and  desig- 
nated with  the  corresponding  letter. 

(a)  Accounts  and  Notes  Receivable  past  due.  A 
large  proportion  of  past  due  and  doubtful  accounts 
indicates  unsatisfactory  credit  and  collection  methods 
and  depreciates  the  value  of  the  accounts  due  as  well 
as  not  due. 

(b)  If  any  loans  have  been  made  to  officers,  etc., 
the  credit  man  should  satisfy  himself  on  the  following 
points:     Does  the  condition  of  the  business  warrant 


234         CREDITS  AND  COLLECTIONS 

making  loans  to  directors  or  officers?  What  is  the 
effect  of  the  salesman's  overdrafts,  seldom  collectible, 
upon  the  real  selling  cost?  If  money  has  been  ad- 
vanced to  a  subsidiary,  what  is  the  condition  of  the 
subsidiary?  How  about  its  earning  power?  Has  the 
investment  been  used  to  purchase  fluid  or  slow  assets? 
Is  the  condition  such  that  the  parent  company  can 
reasonably  expect  repayments  reducing  the  investment 
or  is  the  outlook  such  that  more  funds  will  be  re- 
quired, necessitating  a  further  drain  upon  the  work- 
ing capital  of  the  parent  company?  In  this  connection 
it  is  important  to  know  whether  the  subsidiary  has  any 
liabilities  outside  of  those  to  the  parent  company. 
Moreover,  it  is  important  to  be  well  informed  on  these 
three  questions : 

1.  What  is  the  actual  net  worth  of  the  investment., 
as  indicated  by  an  analysis  of  the  balance  sheet  of  the 
subsidiary  company? 

2.  Has  the  subsidiary  company  proven  to  be  a  prof 
itable  investment? 

3.  What  is  its  influence  upon  the  working  capital 
or  financing  of  the  parent  company? 

(c)  Investments.  The  investments  may  be  either 
stocks  or  securities  of  subsidiary  companies  or  securi- 
ties in  other  companies.  If  the  investments  are  those 
in  a  subsidiary  company,  they  are  fixed  assets,  and 
should  be  considered  as  other  fixed  assets,  that  is,  not 
assets  available  for  paying  debts  in  the  ordinary  course 
of  business,  but  only  as  possible  sources  of  ultimate 
payment  in  case  the  business  is  liquidated.  If  the 
investments  are  stocks  or  bonds  of  other  companies  it 
is  necessary  to  consider  whether  there  is  a  ready  mar- 


ANALYSIS  OF  STATEMENT  235 

ket  for  them,  and  what  their  present  value  is.  If  the 
securities  are  listed  on  an  exchange  and  actively  dealt 
in,  they  may  be  considered  practically  the  equivalent 
of  cash,  subject,  however,  to  variations  in  market 
value.  On  the  other  hand,  if  the  securities  are  not 
readily  saleable,  they  have  little  value  for  debt  paying 
purposes,  and  the  credit  man  should  consider  whether 
investing  in  them  has  not  diverted  too  much  capital 
from  the  business. 

(d)  Insurance.  So'  important  is  the  effect  of  in- 
surance upon  credit  that  the  National  Association  of 
Credit  Men  has  a  special  Committee  on  Fire  Insur- 
ance, whose  important  duty  it  is,  among  others,  to  de- 
vise ways  and  means  of  inducing  debtors  to  carry 
adequate  insurance  as  a  protection  against  fire  losses. 
A  comprehensive  educational  campaign  has  been  car- 
ried on  by  the  Association  to  show  debtors  the  impor- 
tance of  carrying  adequate  fire  insurance  in  sound  in- 
surance companies,  and  to  show  creditors  the  impor- 
tance of  advising  all  debtors  to  insure  against  fire. 

A  merchant  may  be  a  keen  merchandising  man,  may 
have  sterling  character,  and  may  have  adequate  cap- 
ital invested  in  the  business,  but  if  he  carries  no  fire 
insurance,  all  these  may  be  insufficient  in  case  of  fire. 
The  fire  may  destroy  his  entire  stock  and  leave  little 
for  the  payment  of  his  creditors.  In  fact,  numerous 
instances  have  occurred  where  the  creditors  were  left 
practically  nothing,  and  the  debtor  himself  absolutely 
nothing  with  which  to  begin  business  anew  and  re- 
cuperate his  losses.  The  merchant  who  does  not  carry 
adequate  insurance  is  a  dangerous  risk ;  and  before 
extending  credit,   tlie  credit  man  should  insist  that 


236         CREDITS  AND  COLLECTIONS 

insurance  be  carried  in  sufficient  amounts  and  in  sound 
companies. 

In  connection  with  this  item  of  fire  insurance,  it  is 
well  to  note  whether  all  the  assets  are  fully  covered. 
The  fact  that  they  are  not  may  be  due  to  one  of  two 
reasons:  (i)  the  merchant  may  be  careless  in  not 
protecting  all  his  assets  with  insurance,  or  (2)  the 
assets  may  be  overstated  in  the  financial  statement. 

A  more  recent  step  toward  the  protection  of  a  busi- 
ness and  its  creditors  is  the  insurance  of  the  lives  of 
officers  of  a  corporation  or  members  of  a  firm  or  even 
of  the  life  of  an  individual  proprietor  for  the  benefit 
of  the  business.  The  death  of  an  important  member 
of  a  business  often  entails  a  great  loss  to  the  business. 
In  some  cases  the  success  of  the  business  depends  on 
the  activity  of  one  individual.  Certainly  in  the  case 
of  these  "one  man"  concerns,  life  insurance  should 
be  carried  to  protect  the  creditors.  In  fact,  some  credit 
men  refuse  credit  to  such  concerns,  unless  business 
life  insurance  is  carried.  Certainly,  the  carrying  of 
business  life  insurance  tends  to  strengthen  the  credit 
risk. 

(e)  Accounts  and  Notes  Payable,  past  due.  Does 
the  proportion  of  past  due  accounts  and  notes  indi- 
cate failure  to  take  advantage  of  cash  discounts?  This 
is  an  important  consideration,  for  in  keenly  competi- 
tive lines  of  business,  the  margin  of  profit  is  so  small 
that  the  profits  of  the  business  depend  largely  on 
whether  all  discounts  are  taken  advantage  of.  More- 
over, if  the  quick  assets  appear  ample  to  take  care  of 
the  current  liabilities,  do  the  past  due  accounts  payable 
mean  that  the  assets  are  inflated?     Or  does  it  per- 


ANALYSIS  OF  STATEMENT  237 

haps  signify  that  the  accounts  receivable  are  slow, 
merchandise  selling  poorly  and  cash  needed  for  cur- 
rent expenses? 

(f)  Mortgages  and  Bonds.  The  due  date  of  a 
mortgage  is  very  important.  A  mortgage  on  property 
which  has  substantially  depreciated  may  not  be  re- 
newed and  the  results  may  be  disastrous  to  all  con- 
cerned. For  illustration,  a  recent  case  may  be  cited. 
A  manufacturer  carried  a  heavy  mortgage  on  prop- 
erty which,  on  account  of  the  shifting  of  the  business 
center,  had  depreciated  materially.  When  the  mort- 
gage became  due  he  was  unable  to  renew  it  or  to 
obtain  another  loan  in  its  place.  The  mortgagee  fore- 
closed. The  property  was  sold  for  less  than  the 
amount  of  the  mortgage  and  the  mortgagee  obtained 
a  deficiency  judgment  against  the  manufacturer  for 
the  balance.  Although  the  manufacturer's  financial 
condition  was  otherwise  not  very  strong,  favorable 
business  circumstances  had  previously  warranted  the 
belief  that  his  affairs  would  take  a  turn  for  the  better. 
But  confronted  with  this  sudden  new  demand  his  re- 
sources could  not  stand  the  pressure  and  he  was  forced 
into  bankruptcy.  Thus  an  apparent  asset  represented 
by  the  book  equity  of  the  investment  in  the  real  prop- 
erty was  converted  into  a  liability  resulting  in  disas- 
trous consequences.  It  can  be  readily  understood, 
then,  why  it  is  of  the  utmost  importance  to  know  not 
only  the  gross  value  of  the  real  estate,  but  also  the 
amount  and  due  date  of  the  liens  thereon. 

(g)  Contingent  Liabilities.  These  are  potential  ob- 
ligations becoming  real  only  upon  the  happening  of 
certain  contingencies.     Until  such  conditions  arise  the 


238         CREDITS  AND  COLLECTIONS 

debts  are  not  chargeable  and  need  not  be  included 
among  the  liabilities  in  the  statement,  but  the  exist- 
ence of  contingent  liabilities  should  be  disclosed  in 
these  supplementary  remarks. 

The  contingent  liability  as  guarantor  or  surety  is 
that  arising  from  the  guarantees  of  the  payment  of 
another's  account.^  Until  the  person  whose  account  is 
guaranteed  has  defaulted  the  guarantor  has  no  present 
liability.  To  discover  the  possibility  of  default  the 
credit  man  should  investigate  the  circumstances  sur- 
rounding the  guarantee.  The  liability  as  guarantor  or 
surety  may  also  arise  out  of  agreements,  leases,  pend- 
ing law  suits,  etc. 

The  contingent  liability  as  endorser  arises  when  a 
merchant  endorses  his  notes  or  bills  receivable  or 
"trade  acceptances,"  ^  which  he  has  received,  at  his 
bank  before  their  maturity.  When  these  bills  become 
due,  the  bank  presents  them  to  the  maker,  and  if  any 
of  them  are  not  honored,  the  merchant  who  discounted 
them  must  reimburse  the  bank.  Of  course,  in  turn, 
the  merchant  can  collect  from  the  maker  of  the  paper 
provided  the  maker  is  responsible.  ^ 

Accommodation  Note}  Another  way  in  which  a 
merchant  may  become  contingently  liable  is  by  endors- 
ing a  note  for  the  accommodation  or  benefit  of  some- 
body else.  In  this  case  the  endorser  does  not  receive 
any  of  the  proceeds  of  the  discounted  note.  But  if 
the  person  accommodated   fails  to  pay  the  bank  at 

^  See  page  358,  post. 

2  See  page  21,  ante. 

^  See  page  42,  ante. 

*  See  page  44,  ante. 


ANALYSIS  OF  STATEMENT  239 

maturity,  the  endorser  becomes  liable.  Credit  men 
should  carefully  investigate  accommodation  endorse- 
ments. The  practice  of  two  weaker  concerns  exchang- 
ing such  accommodations  may  in  the  event  of  the  fail- 
ure of  one  force  the  failure  of  the  other.  This  mode 
of  financing  should  be  discouraged. 

(h)  Net  Sales,  This  information  is  necessary  so 
that  the  credit  man  may  ascertain,  first,  whether  the 
volume  of  the  business  is  commensurate  with  the  cap- 
ital employed ;  and,  second,  whether  the  stock  is  mov- 
ing rapidly  enough.  The  number  of  times  the  mer- 
chandise stock  has  been  sold  or  turned  over  during 
the  year  is  called  the  "turn-over."  To  ascertain  the 
turn-over  divide  the  average  inventory  at  cost  into 
the  sales  at  cost.  This  turn-over  will  be  found  to  vary 
in  different  lines  of  business.  To  illustrate,  novelties 
must  naturally  be  disposed  of  quicker  than  staples. 
Therefore,  to  determine  the  efficiency  of  a  business 
from  the  "turning  over"  of  its  stock,  a  knowledge  of 
the  average  turn-over  in  the  line  of  business  involved 
is  necessary. 

If  the  sales  appear  too  large  in  proportion  to  the 
capital  invested  in  the  business,  the  inference  may  be 
drawn  that  the  available  capital  is  being  overstrained. 
To  check  up  the  character  of  the  sales  and  to  sub- 
stantiate the  above  inference,  recourse  must  be  had 
to  the  trade  opinions  to  see  whether  the  merchant's 
bills  are  being  promptly  paid.  If  they  are  not,  the 
conclusion  is  obvious  that  the  merchant  is  overextend- 
ing  credits  and  overtaxing  his  capital. 

If  the  merchandise  turn-over  is  below  a  fair  average, 
either  the  inventory  has  been  overvalued,  too  much 


240         CREDITS  AND  COLLECTIONS 

stock  is  being  carried,  or  the  inventory  represents  an 
accumulation  of  old  stock,  or  the  selling  efficiency  of 
the  merchant  is  below  the  average. 

It  is  well  also  to  compare  the  net  sales  with  the 
accounts  receivable.  If,  considering  the  period  of 
credit  extended,  the  accounts  receivable  seem  unduly 
large  and  out  of  proportion  to  sales,  the  probabilities 
are  that  many  of  the  accounts  are  old  and  uncol- 
lectible. 

(i)  Expenses.  In  examining  this  item,  the  credit 
man  should  ask  himself  these  questions:  Is  total  ex- 
pense too  high  in  proportion  to  the  sales?  If  so,  does 
it  mean  too  much  overhead  expenses?  Is  the  rent 
excessive?  In  view  of  the  volume  of  sales  and  gross 
profits,  do  the  expenses  indicate  that  the  business  is 
organized  on  an  unprofitable  basis?  If  the  total  seems 
to  be  too  low,  is  it  correct? 

(j)  Profits.  This  is  an  index  of  the  efficiency  of 
the  capital.  The  result  given  here  should  be  consist- 
ent with  all  other  factors.  If  conditions  in  any  given 
line  were  particularly  depressed,  making  it  practically 
impossible  for  any  concern  to  have  made  money,  and 
the  concern  shows  a  considerable  gain,  such  a  result  in 
the  face  of  adverse  conditions  will  bear  investigation. 

(k,  1,  m)  Dhndcnds.  This  amount  should  be  com- 
pared with  the  profits  and  the  working  capital  as  in- 
dicative of  the  policy  of  the  corporation  in  paying 
dividends.  L^nless  a  sufficient  portion  of  the  profits  is 
left  in  the  business  to  reinforce  its  working  capital, 
the  dividend  policy  of  the  corporation  may  be  looked 
upon  with  disfavor.     In  fact,  the  payment  of  divi- 


ANALYSIS  OF  STATEMENT  241 

dends,  in  the  face  of  inadequate  working  capital,  is  a 
danger  signal. 

(n)  Incorporation,  etc.  Owing  to  the  lack  of  uni- 
formity in  the  various  state  corporation  laws,  in  order 
to  be  in  the  position  to  determine  at  any  time  the 
rights  and  obligations  of  the  debtor,  it  is  well  to  know 
under  the  laws  of  what  state  he  is  incorporated. 

(o)  Secured  creditors.  This  is  important  to  know 
for  two  reasons.  First,  any  property  which  is  pledged 
for  the  payment  of  one  creditor  will  not  be  available 
for  others.  Second,  the  fact  that  the  debtor  must  give 
security  for  credit  obtained  is  an  indication  of  weak- 
ness. Moreover,  as  a  rule  one  creditor  wants  to  be  as 
well  secured  as  other  creditors. 

(p)  Suits  pending.  The  mere  fact  that  a  debtor  is 
being  sued  is  not  in  itself  sufficient  to  cause  any  alarm 
to  creditors.  For  example,  it  is  not  unusual  for  a 
merchant  to  be  sued  by  one  of  his  employees  for 
wages  in  dispute.  It  must  be  remembered  that  every 
one  has  a  constitutional  right  to  sue,  and  the  mere 
bringing  of  the  suit  is  not  any  evidence  of  the  justice 
of  the  claim  against  the  defendant.  However,  the 
credit  man  should  investigate  the  nature  of  the  suits, 
and  see  if  any  are  brought  by  unpaid  creditors  to  col- 
lect undisputed  claims. 

(q)  Inventory.  The  reason  for  obtaining  this  in- 
formation was  discussed  sufficiently  under  the  analysis 
of  the  statement  itself. 

(r)  Books  of  Account.  It  is  instructive  to  know 
what  books  of  account  the  debtor  keeps  in  order  to 
form  an  idea  of  the  accounting  methods  employed  in 
preparing  the  statement.     This  knowledge  is  also  val- 


242         CREDITS  AND  COLLECTIONS 

liable  in  connection  with  any  prosecution  undertaken 
under  the  federal  or  state  false  statement  laws,  or, 
as  will  appear  later,  in  case  of  the  bankruptcy  of  the 
debtor. 

(s)  Bank  zmth.  The  name  of  the  debtor's  bank 
should  be  obtained  so  that  credit  information  concern- 
ing the  debtor  can  be  secured  from  it  when  necessary. 

OTHER    INFORMATION 

In  addition  to  the  above  the  questionnaire  usually 
calls  for  the  names  of  the  officers  and  directors,  in  the 
case  of  a  corporation,  or  the  names  of  the  special  and 
general  partners,  in  the  case  of  a  partnership.  Fur- 
ther investigation  may  then  be  made  into  the  charac- 
ter of  the  individuals  behind  the  concern.  Moreover, 
it  must  not  be  forgotten,  that  in  the  case  of  a  part- 
nership, each  general  partner  is  individually,  as  well 
as  jointly,  liable  for  all  the  debts  of  the  partnership. 
In  case  of  insolvency,  the  creditors  of  the  partnership 
can  look,  not  only  to  the  partnership  assets,  but  also 
to  all  the  assets  of  each  general  partner,  except  those 
specially  exempted  under  the  laws  of  the  state.  On 
the  other  hand,  the  special  partners'  liability  is  lim- 
ited to  the  amount  actually  contributed  to  the  business. 

EXEMPTIONS 

Under  the  laws  of  the  several  states,  a  debtor  may 
hold  a  certain  amount  of  his  property  immune  from 
all  liability  for  his  debts.  That  is  to  say,  property 
which  is  exempt  under  state  laws  cannot  be  attached 


ANALYSIS  OF  STATEMENT  243 

or  otherwise  levied  on  to  satisfy  the  claims  of  cred- 
itors. Thus,  real  property,  of  not  more  than  a  cer- 
tain value,  occupied  by  a  debtor  as  a  residence  for 
himself  and  family,  is  frequently  exempted.  Such 
exempt  real  property  is  called  a  homestead.  Usually 
to  have  such  property  exempt,  the  debtor  must  record 
a  claim  of  exemption  in  a  public  office.  Household 
articles,  wearing  apparel  and  other  goods  or  chattels 
of  not  more  than  a  specified  value  are  also  often  ex- 
empted from  creditors'  judgments.  Of  course,  it  is 
necessary  for  the  creditor  to  know  what  exemptions 
the  debtor  claims,  for  the  net  worth  of  the  debtor's 
estate,  as  far  as  creditors  are  concerned,  is  reduced 
to  the  extent  of  the  exemption.  For  this  reason  it  is 
especially  important,  in  considering  the  financial  state- 
ment of  a  debtor  whose  responsibility  is  limited,  to 
know  what  part  of  the  assets  may  be  exempted  by  the 
state  law. 

THE  ASSIGNMENT  OF  ACCOUNTS  RECEIVABLE 

The  answer  to  the  question  (t)  "Have  you  pledged 
or  assigned  any  of  the  above  accounts  receivable  of 
customers?"  is  vitally  interesting  to  the  credit  man. 
The  accounts  receivable  ordinarily  constitute,  after 
cash,  the  most  liquid  asset  in  the  statement  of  a  manu- 
facturer or  wholesaler.  It  is  extremely  important 
to  know  whether  this  asset  is  in  any  way  encumbered 
or  sold,  so  that  its  realizable  value  may  be  accurately 
estimated.  The  question  (t)  asked  will  produce  this 
information. 

The  book  account  has  a  legal  status.     It  may  be 


244         CREDITS  AND  COLLECTIONS 

sold  or  mortgaged.  The  practice  of  raising  money 
through  the  transfer  of  accounts  receivable  has  as- 
sumed enormous  proportions.  In  general,  there  are 
four  ways  in  which  money  may  be  raised  on  accounts, 
or,  as  the  expression  is,  accounts  may  be  financed. 

( 1 )  Accounts  receivable  may  be  sold  outright.  The 
purchaser  acquires  the  same  right  of  action  against 
the  debtor  as  the  original  creditor  had. 

(2)  Accounts  may  be  discounted  and  guaranteed. 
Under  this  system  the  commission  house  or  banker 
will  advance  funds  covering  a  large  percentage  of  the 
full  net  value  of  the  invoices  and  insure  the  borrower 
against  bad  debt  losses  on  such  invoices.  Charges 
are  made  for  interest  and  also  commissions  to  com- 
pensate for  services  rendered  and  the  insurance  fea- 
ture. The  difference  between  the  net  value  of  the 
invoice,  less  the  amount  of  the  commission  and  interest 
charges,  less  the  amount  advanced,  represents  the 
equity  the  assignor  retains  in  the  account.  This  is  in- 
tended as  a  margin  of  safety  to  secure  the  assignee 
against  reduction  in  the  value  of  the  invoice  by  reason 
of  returned  goods,  claims  or  any  other  allowance,  but 
not  by  reason  of  bad  debt  losses.  Should  the  full 
amount  be  collected,  or  should  no  claims  for  returns 
or  damaged  goods  be  made,  the  assignor  is  paid  the 
equity.  If  the  equity  proves  insufficient  the  assignor 
must  make  good  the  deficit,  but  the  banking  house 
bears  losses  from  bad  debts.  For  this  reason,  all  in- 
voices are  first  approved  by  the  credit  department  of 
the  lender  and  the  invoices  are  rendered  by,  marked 
payable  to,  and  collected  by,  the  banker.  Time-hon- 
ored institutions  are  engaged  in  this  business  and  the 


ANALYSIS  OF  STATEMENT  245 

operations  conform  with  high  ethical  standards.     Full 
and  thorough  publicity  is  inherent  in  this  system. 

(3)  Funds  are  advanced  against  unguaranteed  as- 
signed accounts  under  arrangements  providing  for  the 
notification  of  the  debtor.  Notice  is  sent  to  all  debtors 
whose  accounts  have  been  assigned  and  all  subsequent 
invoices  assigned  are  stamped  with  a  notice  to  the 
debtor  to  the  effect  that  the  account  has  been  assigned 
and  is  payable  to  the  banker,  whose  name  is  given. 

(4)  Funds  are  advanced  against  unguaranteed  ac- 
counts under  agreements  providing  that  the  debtors  of 
the  assignor  are  not  to  be  notified.  This  is  commonly 
known  as  the  non-notification  plan. 

It  will  be  noted  that  the  guarantee  feature  does  not 
apply  to  either  the  third  or  the  fourth  systems  dis- 
cussed. In  both  these  cases  a  percentage  of  the  in- 
voice value  is  advanced,  the  margin  of  safety  depend- 
ing upon  the  quality  of  the  account  and  the  standing 
of  the  borrower.  If  the  proceeds  of  the  assigned 
accounts  do  not  satisfy  in  full  the  claim  of  the  lender 
he  has  a  right  of  action  against  the  borrower  for  the 
unsatisfied  balance.  But,  even  though  the  accounts  are 
not  guaranteed,  a  commission  or  bonus  is  charged  for 
services,  in  addition  to  a  charge  made  for  interest. 

ADVANTAGES  OF  ASSIGNING  ACCOUNTS 

The  assigning  of  book  accounts  has  enabled  the  bor- 
rowers ( I )  to  use  advantageously  the  money  received 
from  the  lender  in  making  cash  purchases  and  dis- 
counting their  own  bills,  (2)  profitably  to  increase 
their  business,  and   (3)  to  obtain  the  required  relief 


246         CREDITS  AND  COLLECTIONS 

when  temporarily  embarrassed  owing  to  the  unavail- 

abiHty  of  assets. 


OBJECTIONS  TO  ASSIGNMENT  OF  ACCOUNTS 

Several  objections  have  been  raised  against  bor- 
rowing funds  on  the  assignment  of  open  book  ac- 
counts. These  objections  may  be  briefly  summarized 
as  follows : 

First:  The  practice  encourages  unsound  expansion 
of  the  borrowers'  business.  The  borrower,  in  an  effort 
to  bolster  up  his  sales  and  increase  his  profits,  is  in- 
clined to  increase  his  investment  in  fixed  assets  and  to 
grant  credit  more  freely.  He  does  this,  knowing  that 
he  can  readily  transfer  his  accounts  and  realize  on 
them.  Of  course,  if  there  turn  out  to  be  any  losses 
later,  he  must  bear  them.  The  capable  merchant,  how- 
ever, will  look  ahead  and  confine  his  business  within 
safe  limits. 

Second :  The  companies  which  lend  funds  on  the 
transfer  of  accounts  charge  excessively  high  rates,  at 
least  as  compared  with  bank  loaning  rates.  For  ex- 
ample, the  rates  range  up  to  more  than  thirty  per 
cent,  averaging  more  than  fifteen  per  cent.  But  it  is 
urged  that  the  merchant,  who  can  borrow  money  at 
15%  and  discount  his  bills  payable,  saves  money.  This 
is  true  where  the  cash  discount  is  as  high  as  2/10  net 
30.  If  the  discount  rate  is  so  high  and  the  merchant 
c&nnot  borrow  money  at  his  bank  at  6%,  he  is  prob- 
ably justified  in  paying  15%  for  money  he  borrows  in 
order  to  take  advantage  of  his  discounts.  Only  those 
merchants,  however,  who  cannot  borrow  money  from 


ANALYSIS  OF  STATEMENT  247 

a  bank  at  6%  are  justified  in  borrowing  on  the  assign- 
ment of  their  accounts. 

In  many  instances  a  debtor  resorts  to  this  plan  of 
financing  only  when  he  is  in  a  weakened  condition  and 
requires  some  ready  cash  to  pay  insistent  creditors. 
Frequently  the  fees  he  must  pay  for  the  money  bor- 
rowed are  so  excessive  that  they  tend  to  precipitate 
the  failure  of  the  debtor. 

Third  :  The  practice  makes  possible  and  easy  fraud- 
ulent manipulation  on  the  part  of  dishonest  debtors. 
Of  course,  the  mere  fact  that  an  honest  debtor  resorts 
to  this  method  of  financing  would  hardly  affect  his 
honesty.  But  a  dishonest  debtor  may  pledge  his  ac- 
counts receivable  and  raise  cash  which  he  misappro- 
priates, or  uses  to  stimulate  his  credit  by  making 
prompt  payments  for  a  time  to  deceive  his  creditors. 

The  creditors  (under  the  non-notification  system) 
think  the  debtor  is  collecting  his  outstandings  in  the 
usual  course  and  using  the  proceeds  for  paying  his 
debts,  whereas  he  is  secretly  assigning  his  accounts. 
Of  course,  if  the  creditor  knew  the  debtor  was  thus 
financing  his  business,  the  credit  man  would  know 
how  to  handle  the  situation.  In  fact  he  would  prob- 
ably not  extend  credit,  except  possibly  on  a  ten-day 
cash  discount  basis. 

As  we  have  seen,  the  credit  man,  when  determining 
the  credit  strength  of  the  debtor,  relies  upon  the  ac- 
counts receivable  as  one  of  the  most  available  assets. 
He  is  therefore  entitled  to  know  when  the  accounts 
are  transferred  so  that  he  can  form  his  own  opinion 
as  to  whether  in  the  particular  instance  such  financing 
is  in  the  interests  of  the  business.     Any  plan  designed 


248         CREDITS  AND  COLLECTIONS 

deliberately  to  withhold  this  information  from  him  is 
deceitful  and  is  a  breeder  of  serious  abuses.  Thus,  we 
find  that  the  really  serious  objection  to  this  plan  of 
financing  accounts,  without  notifying  the  debtors  or 
creditors,  is  the  secrecy  of  the  system.  Then,  too,  an 
important  reason  why  this  system  is  looked  upon  un- 
favorably by  credit  men  is  that  when  a  debtor  who 
assigned  his  accounts  fails,  as  a  general  proposition, 
the  estate  is  found  in  extremely  wretched  condition. 
The  good  accounts  are  usually  transferred,  leaving 
only  the  assets  of  inferior  value  for  liquidation,  and 
the  dividends  for  the  creditors  are  usually  sub-normally 
low.  This  condition  is  made  possible  because  the 
secret  cashing  of  the  accounts  deceives  the  credit  man 
as  to  the  true  condition  of  the  debtor  who  is  rapidly 
going  down  hill,  even  until  the  last  moment. 

To  prevent  a  merchant  from  assigning  his  accounts 
secretly,  vigorous  efforts  are  now  being  made  by  the 
National  Association  of  Credit  Men  and  a  number  of 
its  local  branches  to  have  laws  enacted  which  will 
compel  such  a  merchant  (i)  to  register  notice  of  the 
transfer  of  accounts  in  a  public  ofiice,  or  (2)  to  give 
notice  of  the  transfer  to  the  debtors  whose  accounts 
have  been  transferred.  If  this  is  not  done,  it  is  pro- 
vided that  the  transfer  is  to  be  void  as  against  cred- 
itors. 

COMPARATIVE   STATEMENTS 

If  an  exhaustive  study  of  the  balance  sheet  will  ac- 
curately reflect  the  present  condition,  a  comparison 
with  the  preceding  statements  will  throw  a  strong 
light  upon  the  tendencies  of  the  business.     From  an 


ANALYSIS  OF  STATEMENT  249 

analysis  of  comparative  statements  it  can  be  seen 
whether  the  business  is  going  forward,  standing  still, 
or  going  backward.  In  comparing  statements  of  dif- 
ferent years,  however,  it  is  necessary  to  note,  not  only 
the  change  in  the  net  worth  of  the  business,  but  also 
the  changes  in  the  separate  items.  The  present  net 
worth  may  be  larger,  but  the  increase  may  be  in  fixed 
assets,  in  which  case  the  business  might  not  be  in  any 
better  position.  Possibly  there  may  be  an  increase  in 
the  liabilities.  This  may  result  in  a  loss  in  the  net 
worth.  Or,  if  not,  the  corresponding  increase  may 
be  in  the  fixed  assets,  in  which  case  the  business  would 
be  going  backward. 

The  vital  question  is.  Has  the  new  relation  of  quick 
assets  to  quick  liabilities  increased  or  diminished  the 
liquidity  of  the  business?  It  is  not  the  amount  of  the 
assets,  but  rather  the  fluidity  of  the  condition,  which 
denotes  credit  strength.  If  the  business  is  going  for- 
ward the  ratio  of  quick  assets  to  quick  liabilities 
should  increase.  If  the  ratio  is  decreasing,  even 
though  the  actual  amount  of  quick  assets  over  quick 
liabilities  is  increasing,  the  credit  condition  is  becom- 
ing weaker.  As  an  indicator  of  the  trend  of  the 
business  the  value  of  comparative  statements  cannot 
be  over-estimated. 


THE   HUMAN   EQUATION 

In  considering  the  financial  statement  as  a  basis 
for  credit  the  student  will  not  be  unmindful  of  the 
fact  that  the  title  to  credit  cannot  be  read  entirely  in 
the  figures.     Whose   statement   is  it?     What  is  his 


250         CREDITS  AND  COLLECTIONS 

character?  Obviously,  unless  the  debtor  is  trust- 
worthy the  statement  is  of  little  value.  What  are  his 
habits?  Is  he  a  man  of  thrift,  industry  and  stability? 
Is  he  a  man  of  good  business  ability?  How  capable 
is  he  to  use  his  resources?  Is  the  business  successful? 
Is  the  business  well  organized  and  well  managed?  Is 
the  policy  conservative  or  is  it  speculative?  In  brief, 
may  the  credit  man  be  confident  that  the  resources 
at  the  command  of  the  business  will  be  faithfully  and 
efficiently  used?  Not  in  a  few  instances  the  debtor, 
soon  after  making  a  satisfactory  showing,  has  been 
tempted  hazardously  to  expand  the  business.  The  cap- 
ital was  thereby  extremely  strained  and  when  the 
hoped  for  results  did  not  materialize  the  business  was 
exposed  to  serious  consequences.  It  is  the  moral  risk 
then  that  counts  for  more  than  anything  else.  "No 
statement  is  better  than  the  man  behind  it,"  is  an  axiom 
well  understood  by  credit  men.  Character  and  Ability 
are  indispensable.  Adequate  working  capital,  how- 
ever, is  also  required  to  establish  a  sound  basis  for 
credit. 


CHAPTER   XIV 

COLLECTIONS 

Prompt  collections  are  a  vital  feature  of  every  busi- 
ness. Irrespective  of  the  size  of  the  business,  profits 
are  dependent  largely  upon  the  number  of  times  a 
merchant  can  turn  over  his  capital,  and  frequent  turn- 
overs can  hardly  be  coupled  with  slow  collections.  No 
matter  how  large  the  volume  of  sales,  the  profits  can- 
not be  proportionately  large,  unless  collections  are 
promptly  made.  Then,  too,  slow  collections  cause  a 
business  to  lose  the  use  of  its  capital  tied  up  in  over- 
due outstanding  accounts  receivable.  Laxity  in  en- 
forcing prompt  payments  might  also  embarrass  a 
house  through  lack  of  funds.  Moreover,  it  might  be 
unable  to  take  advantage  of  discounts  in  paying  bills. 

Still  another  consequence  of  looseness  in  making 
prompt  collections  is  the  harmful  influence  on  volume 
of  sales.  In  all  likelihood  a  debtor  whose  account 
is  already  overdue  will  not  attempt  nor  will  he  be  en- 
couraged to  place  new  current  orders  with  that  house. 
Prompt  collections  prevent  the  running  up  of  a  large 
overdue  account.  Not  only  these  factors  but  also  the 
psychology  of  demanding  prompt  payments  must  be 
considered  by  the  credit  department  when  extending 
credit  and  making  collections.  Most  debtors  respect 
a  house  which  shows  its  accounts  are  closely  watched 

251 


252         CREDITS  AND  COLLECTIONS 

and  promptly  collected,  and  they  will  pay  the  accounts 
of  such  a  house  more  readily  than  the  accounts  of  a 
house  which  is  lax  and  careless  in  demanding  prompt 
payment.  The  aim  of  the  credit  department,  then, 
should  be  to  get  the  customers  of  the  house  to  acquire 
the  habit  of  making  prompt  payments. 

CLASSES  OF   DELINQUENTS 

The  credit  man  who  is  successful  in  making  prompt 
collections  considers  the  collection  of  the  account  at 
the  time  of  granting  the  credit.  When  he  checks  an 
order  he  anticipates  the  difficulties  he  may  meet  in 
collecting  the  account  promptly,  and  prepares  for 
them.  Of  course,  every  credit  man  prefers  to  have 
as  many  unquestionably  good  accounts  as  possible,  but 
he  is  at  times  under  a  practical  compulsion  to  check 
questionable  accounts,  for  his  function  is  not  alone  to 
keep  down  losses,  but  also  to  increase  profitable  sales. 
He  must,  therefore,  accept  many  accounts  that  may 
prove  difficult  to  collect.  However,  most  of  the  ac- 
counts will  be  of  the  class  which  either  "discount"  or 
"pay  just  before"  or  "promptly  at  maturity,"  and 
which,  therefore,  require  little  or  no  attention. 

The  smaller  group  of  debtors  who  do  not  meet  their 
obligations  promptly  may  be  divided  into  three  gen- 
eral classes : 

First.  Those  who  are  able  to  pay,  but  negligently 
defer  doing  so  and  unfortunately  require  more  or  less 
urging. 

Second.  Those  who  do  not  intend  to  pay  until 
forced. 


COLLECTIONS  253 

Third.  Those  who  through  the  happening  of  un- 
foreseen contingencies  over  which  they  have  no  con- 
trol find  themselves  obliged  to  postpone  their  pay- 
ments. 

Each  of  these  classes  of  debtors  requires  different 
treatment.  Generally  speaking,  the  first  class  can  be 
moved  to  pay  by  making  the  proper  appeal  and  bring- 
ing into  play  the  necessary  pressure.  The  second  class 
can  be  compelled  to  pay  only  through  prompt  and 
severe  measures.  A  debtor  in  the  third  class  will  ordi- 
narily pay  as  soon  as  he  is  in  a  position  to  do  so.  He 
should  be  assisted  in  every  reasonable  way  until  he  is 
able  to  tide  over  his  temporary  embarrassment  and 
regain  his  financial  strength. 

In  view  of  the  fact  that  each  of  these  classes  of 
debtors  requires  somewhat  different  handling,  the 
credit  man  should  determine  as  early  as  possible  the 
reason  for  the  delinquency.  If  the  debtor  is  known 
as  a  chronically  slow  payer  every  effort  should  be  made 
to  impress  upon  him  the  wisdom  and  advisability  of 
paying  more  promptly.  At  the  same  time  care  should 
be  taken  not  to  offend  him  so  that  his  account  will  be 
lost,  for  many  profitable  accounts  belong  in  this  cate- 
gory. Drastic  action,  such  as  placing  the  account  in 
the  hands  of  an  attorney,  should  be  delayed  as  long  as 
possible.  This  is  especially  true  where  the  account  is 
one  of  long  standing.  Where,  however,  the  account  is 
a  new  one,  the  credit  man  need  not  be  so  patient.  And 
where  the  credit  man  suspects  fraud  or  dishonesty  on 
the  part  of  the  debtor,  no  time  should  be  lost  in  forcibly 
demanding  prompt  payment. 


254         CREDITS  AND  COLLECTIONS 

COLLECTION    SYSTEMS 

While  it  is  probably  true  that  each  account  should 
be  handled  according  to  the  merits  of  the  individual 
case,  nevertheless,  where  a  credit  or  collection  man- 
ager supervises  the  collection  of  several  thousand  ac- 
counts some  kind  of  a  system  must  be  employed.  Hap- 
hazard methods  in  following  up  a  first  statement  usu- 
ally result  in  carelessness  and  neglect  on  the  part  of 
the  debtor  in  making  remittances.  Of  course,  the 
system  adopted  should  be  flexible  enough  so  that  in  its 
operation  due  allowance  will  be  made  for  differences  in 
the  financial  condition,  personality  and  past  record  of 
debtors.  The  system  followed  will  depend,  as  a  matter 
of  policy,  to  a  very  large  extent  upon  the  kind  of 
business  in  which  the  creditor  house  is  engaged;  for 
example,  a  house  selling  a  widely  advertised  non-com- 
petitive product  which  is  bought  in  small  quantities  by 
the  retailer  can  be  more  or  less  arbitrary  in  demanding 
prompt  payment. 

THE  MONTHLY  STATEMENT 

The  first  step  in  any  system  is  the  sending  of  a  bill 
with  the  shipment  of  the  goods.  This  is  followed  by 
sending  statements.  Many  houses  have  adopted  the 
plan  of  sending  statements  on  the  first  of  each  month; 
those  having  items  not  yet  due  serve  as  a  reminder 
that  payment  is  expected  when  due ;  those  having  items 
past  due  are  stamped  with  the  words  "past  due,  please 
remit,"  or  similar  words  requesting  payment.  If  after 
forwarding  two  or  three  monthly  statements  the  ac- 


COLLECTIONS  255 

count  remains  unpaid,  these  houses  send  a  multi- 
graphed  or  personal  letter  calling  attention  to  the  status 
of  the  account  and  requesting  immediate  payment. 
These  letters  are  followed  up  by  drafts  and  various 
other  devices  known  to  the  credit  man  and  hereinafter 
described. 

To  careful  collectors,  the  serious  defects  in  this  kind 
of  a  system  must  be  obvious.  If  a  debtor  is  negligent 
in  making  prompt  remittances,  surely  this  svstem  will 
hardly  accelerate  his  action.  If  a  debtor  is  dishonest, 
this  system  will  probably  give  the  debtor  the  time  he 
requires  to  complete  any  fraudulent  scheme  he  may 
have  devised. 

A  better  system  is  one  which  is  designed  auto- 
matically to  bring  to  the  collector's  notice  daily  such 
accounts  as  require  his  attention,  having  regard  for  the 
location  and  the  credit  standing  of  the  debtor.  Under 
such  a  system,  the  original  bill  itself  might,  in  stating 
the  terms,  indicate  the  date  when  the  bill  is  to  become 
due.  If  monthly  statements  are  sent  to  show  the  con- 
dition of  the  account,  these  statements  might  also  indi- 
cate the  date  of  maturity  of  each  item.  If  bills  are 
not  paid  before  maturity,  statements  should  be  sent 
either  two  or  three  days  before  or  immediately  after 
the  account  becomes  due.  Statements  sent  before  the 
bill  is  due  serve  as  a  reminder  that  the  bill  is  becom- 
ing due,  give  the  debtor  an  opportunity  to  check  with 
reference  to  correctness  and  also  forestall  the  possible 
excuse  oi  the  debtor  that  payment  was  overlooked. 
Statements  sent  immediately  after  the  account  is  due 
serve  as  an  indirect  demand  for  payment.  The  effec- 
tiveness of  these  statements  is  possibly  made  stronger 


256         CREDITS  AND  COLLECTIONS 

by  printing  thereon  a  request  for  payment  and  the 
advice  that  past  due  items  are  subject  to  draft. 

The  procedure  after  these  statements  have  been 
sent  depends  largely  upon  the  nature  of  the  account 
to  be  collected  and  the  kind  of  business  in  which  the 
selling  house  is  engaged.  Usually,  after  allowing  suf- 
ficient time  for  a  remittance  in  response  to  the  state- 
ment, a  brief  formal  letter  is  sent  suggesting  that  the 
debtor  has  probably  overlooked  the  account  and  po- 
litely demanding  payment  by  return  mail. 

FOLLOW  UP  SYSTEMS 

To  facilitate  following  up  this  first  letter  in  the  col- 
lection of  accounts  various  devices  are  employed. 
Some  credit  men,  especially  where  the  number  of  ac- 
counts is  small,  prefer  to  run  through  the  ledger  at 
regular  intervals,  possibly  every  week  or  every  two 
weeks.  This  plan  possesses  the  advantage  of  enabling 
the  credit  man  to  review  the  standing  and  record  of 
each  account  and  keep  better  posted  on  the  develop- 
ment of  an  individual  account.  Further,  under  this 
system  only  one  record  of  the  account  is  made  (i.e.,  in 
the  ledger),  thus  avoiding  duplications  necessary  under 
other  systems.  These  advantages,  at  least  where  the 
number  of  accounts  is  considerable,  are  more  than 
offset  by  the  disadvantages  of  the  system,  namely : 

First.  It  imposes  on  the  credit  man  a  good  deal  of 
unnecessary  detail  and  mechanical  work,  consuming 
considerable  time  which  might  be  spent  to  better  ad- 
vantage solving  more  difficult  credit  problems. 

Second,     The  inspection  of  the  ledger  necessarily 


COLLECTIONS  257 

causes  interruption  and  delay  to  the  work  of  the  book- 
keeper. Then,  too,  the  credit  man  will  usually  find 
it  necessary  to  go  to  another  department  to  see  the 
ledger.  This  invariably  causes  additional  loss  of  time 
to  both  the  credit  man  and  the  bookkeeper  and  may 
slightly  disrupt  the  smooth  running  of  the  credit  de- 
partment. 

Third.  Statements  are  likely  to  be  sent  out  hap- 
hazardly and  at  irregular  intervals,  for  there  is  every 
incentive  under  this  system  to  make  this  work  of  fol- 
lowing up  collections  a  matter  secondary  to  the  other 
duties  of  the  credit  man.  Always  awaiting  an  oppor- 
tunity to  go  over  the  ledger,  the  credit  man  is  likely 
to  defer  the  actual  inspection  until  all  other  matters 
are  disposed  of.  The  result  is,  collections  are  neg- 
lected and  become  slow  and,  eventually,  difficult  to 
collect. 

THE  TICKLER  SYSTEM 

To  overcome  these  disadvantages,  "tickler"  systems 
supplementing  the  ledger  have  been  used  and  found 
successful.  There  is  wide  variance  in  the  details  of 
these  systems  in  use.  The  aim  of  any  such  system 
is  to  place  before  the  credit  man  every  day  all  past 
due  accounts  which  require  his  attention.  Thus  he  is 
saved  the  labor  and  time  necessary  to  run  through  the 
ledger  examining  all  accounts.  The  less  duplication 
of  records  and  the  less  clerical  labor  involved  in  do- 
ing this,  the  more  desirable  would  be  the  system. 

This  result  is  usually  accomplished  by  placing  on  a 
separate  card  the  name  of  the  debtor,  the  amount, 
the  terms  and  date  when  due  for  each  invoice.     A 


258         CREDITS  AND  COLLECTIONS 

carbon  of  the  original  invoice  will  suffice  for  this  pur- 
pose. These  cards  or  carbons  are  then  arranged,  ac- 
cording to  their  maturities,  in  a  tickler  box,  so  that 
all  those  due  on  any  one  day  will  come  up  for  atten- 
tion that  day.  A  clerk  in  the  credit  office  can  then  go 
through  these  carbons,  compare  them  with  the  ledger, 
discard  those  that  have  been  paid,  and  send  statements 
to  the  delinquent  debtors.  A  notation  that  the  state- 
ment was  mailed  is  made  on  the  carbon  of  the  in- 
voice, which  is  then  advanced  ahead  in  the  tickler. 
This  allows  sufficient  time  for  response  from  the 
debtor.  If  the  account  is  not  paid  when  the  carbon 
reappears,  the  credit  clerk  writes  a  formal  letter  in- 
quiring about  the  delinquency  and  requesting  pay- 
ment, at  the  same  time  making  a  note  to  that  effect 
on  the  carbon  and  again  advancing  it  in  the  tickler. 
Upon  the  next  appearance  of  the  carbon,  if  the  invoice 
is  not  paid,  the  collection  is  referred  to  the  credit  man 
who  treats  the  case  as  the  occasion  demands.  If  he 
draws  on  the  debtor  or  writes  another  letter,  a  note 
is  made  on  the  carbon  of  the  original  invoice  and  it 
is  returned  to  a  position  ahead  in  the  tickler.  Thus 
the  tickler  compels  the  attention  of  the  credit  man  or 
his  assistant  to  all  past  due  accounts  at  regular  inter- 
vals. It  requires  little  labor  to  operate,  saves  the  time 
of  the  credit  man,  and  obviates  the  difficulties  encoun- 
tered in  the  ledger  inspection  system  of  following  up 
collections. 

THE  USE  OF  DRAFTS 

Where  no  response  is  had  to  the  first  letter  many 
houses  make  a  practice  of  attempting  to  collect  the 


COLLECTIONS  259 

debt  by  sending-  a  draft  on  the  debtor  through  the 
debtor's  bank.  Some  houses  prefer  to  send  a  draft 
immediately,  if  the  account  is  not  paid  when  due. 
Others  defer  the  sending  of  a  draft  until  it  appears 
that  the  sending  of  statements  and  letters  is  produc- 
tive of  no  good  results.  At  what  time  a  draft  should 
be  sent  depends  entirely  on  the  custom  of  the  trade 
and  on  the  size  and  character  of  the  account.  In  some 
lines  of  business  it  is  the  custom  to  draw  on  the  debtor 
as  soon  as  the  account  becomes  due.  On  the  other 
hand,  in  many  lines  the  practice  of  sending  a  draft 
is  looked  upon  as  a  somewhat  drastic,  if  not  unfriendly 
step,  and  may  have  an  unfavorable  effect  upon  the 
debtor. 

Where  a  draft  is  used,  it  is  either  deposited  in  the 
creditor's  own  bank,  which  forwards  it  to  a  bank  in 
the  debtor's  locality,  or  immediately  sent  by  the  cred- 
itor to  a  bank  in  the  customer's  vicinity.  Many  credit 
men  find  it  profitable  to  make  a  notation  on  their 
ledgers  of  the  name  of  the  debtor's  bank,  as  ascer- 
tained from  checks  sent  by  the  debtor;  and  when  a 
draft  is  used  to  forward  it  to  this  bank.  The  psycho- 
logical effect  on  the  debtor  of  presenting  a  draft 
through  his  own  bank  is  often  productive  of  good 
results.  In  other  cases  the  name  of  the  bank  in  the 
customer's  locality  is  obtained  from  one  of  the  mer- 
cantile agency  books  or  law  lists,  which  usually  include 
a  list  of  banks.  Many  banks  will  present  these  drafts 
to  the  debtor  free  of  charge,  unless  collected,  in  which 
case  an  exchange  charge  is  made.  However,  the  gen- 
eral use  of  drafts  which  are  returned  unpaid  has  im- 
posed such  a  burden  on  banks  that  many  banks  will 


26o         CREDITS  AND  COLLECTIONS 

not  give  careful  attention  to  the  presentation  and  re- 
turn of  the  drafts  unless  a  small  fee  of  at  least  ten 
cents  is  sent  with  the  draft.  It  is  probably  a  better 
practice  for  the  credit  man  to  enclose  this  fee  with 
the  draft,  together  with  polite  instructions  to  the  bank 
as  to  presenting  the  draft  and  holding  it  for  payment, 
with  the  additional  request  to  remit  the  proceeds,  if 
collected. 

At  the  time  the  draft  is  sent  to  the  bank,  a  letter 
should  be  written  to  the  debtor  advising  him  of  this 
fact  so  that  he  will  be  prepared  to  meet  the  draft  when 
it  is  presented.  This  letter  should  intimate  that  prob- 
ably the  debtor  prefers  to  make  payment  in  this  man- 
ner and  suggest  that  he  take  steps  to  meet  the  draft. 

Formerly,  a  draft,  if  not  honored,  menaced  the 
debtor's  credit ;  in  fact,  at  one  time  to  dishonor  a  draft 
was  a  virtual  confession  of  insolvency.  But  under 
business  practice  of  to-day  a  different  significance  is 
attached  to  this  action,  and  drafts  are  returned  now 
with  little,  if  any,  misgiving.  Of  course,  were  a  debtor 
consistently  to  return  all  drafts  on  him,  assuming 
they  were  numerous,  his  actions  would  soon  depress 
his  credit  standing,  especially  at  the  local  bank.  On 
the  other  hand,  the  action  of  the  debtor  in  not  honor- 
ing the  draft  should  not  cause  the  credit  man  any 
unusual  anxiety.  Some  debtors  may  be  temporarily 
out  of  funds,  others  may  resent  the  sending  of  the 
draft  and  show  their  resentment  by  paying  no  atten- 
tion to  it,  while  still  others,  considering  the  draft  a 
reflection  on  their  credit,  prefer  to  remit  by  other 
means.  Then,  too,  the  bank  may  have  been  negligent 
in  presenting  the  draft. 


COLLECTIONS  261 

THE  INDORSEMENT 

When  a  draft  is  not  honored,  it  is  returned  to  the 
drawer  (creditor)  with  a  notation  or  indorsement  giv- 
ing a  brief  reason  for  the  debtor's  failure  to  pay. 
These  notations  sometimes  give  the  creditor  an  insight 
into  the  debtor's  intentions  as  to  paying  the  debt,  and 
furnish  the  creditor  a  better  basis  for  the  future  han- 
dhng  of  the  account.  If  the  indorsement  indicates  that 
no  attention  was  paid  to  the  draft  by  the  debtor,  or 
that  the  debtor  was  unprepared  at  the  time  to  meet  the 
draft,  a  second  draft  might  be  sent  immediately,  to- 
gether with  a  letter  referring  to  the  first  draft  and  sug- 
gesting that  the  debtor  be  ready  to  take  up  the  second 
draft  so  that  there  will  be  no  reflection  on  his  credit. 

If  the  second  draft  is  returned  with  the  same  nota- 
tion immediate  steps  should  be  taken  to  protect  the 
account.  A  telegram  or  night  letter  expressing  sur- 
prise and  requesting  an  immediate  explanation  has 
often  been  found  effective.  If  no  response  is  had  to 
the  telegram,  more  drastic  measures  must  be  taken. 

If  the  draft  comes  back  with  some  other  endorse- 
ment, the  credit  man  should  base  his  next  letter  on  the 
reason  given  by  the  debtor  for  not  paying.  The  kind 
of  letter  and  the  subsequent  steps  will  depend  on  the 
peculiar  conditions  affecting  the  account. 

COLLECTION  CORRESPONDENCE 

Although  it  is  true  that  the  character  of  the  letter 
written  to  collect  an  account  should  be  adjusted  to 
meet  the  requirements  of  each  individual  case,  there 


262         CREDITS  AND  COLLECTIONS 

are  a  few  fundamental  principles  regarding  collection 
correspondence  which  the  credit  man  should  bear  in 
mind.  The  successful  correspondent  puts  himself  in 
the  debtor's  place,  and  tries  to  imagine  what  the  debtor 
will  do  under  the  circumstances.  He  studies  the  debt- 
or's mental  attitude,  and,  by  so  doing,  he  ascertains 
what  kind  of  a  collection  appeal  will  be  the  most  suc- 
cessful. All  appeals  should  be  straightforward  and 
honest.  It  is  never  worth  while  to  apologize  or  to 
invent  excuses  when  calling  upon  a  debtor  to  pay. 
The  credit  man  who  bases  his  appeal  on  the  ground 
that  his  firm  has  some  large  obligations  to  meet  usually 
gains  the  disrespect  of  the  debtor.  The  average  debtor 
believes  either  that  the  reason  given  is  fictitious  or  that 
the  creditor  is  in  a  tight  position,  and  in  either  case 
the  creditor  usually  gains  nothing. 

The  credit  man  wants  the  debtor  to  pay  because  the 
money  is  owing  and  because  he  confidently  expects  the 
debtor  will  meet  his  obligations.  If  the  debtor  can- 
not pay  when  the  bill  is  due,  the  credit  man  is  entitled 
to  a  reason ;  and  no  extension  of  time  should  be  taken 
by  the  debtor  without  the  creditor's  consent.  Of 
course,  if  the  debtor  can  give  some  good  reason  for 
being  unable  to  pay  promptly,  the  credit  man  should 
be  ready  to  grant  a  reasonable  extension  and  to  treat 
the  debtor  equitably.  When  granting  an  extension  the 
credit  man  should  always  fix  a  definite  future  date  on 
which  payment  is  to  be  made,  and  the  debtor  should 
understand  that  payment  is  expected  no  later  than  that 
time.  One  of  the  advantages  of  granting  an  extension 
is  that  it  usually  affords  the  credit  man  an  opportunity 


COLLECTIONS  263 

to  obtain  from  the  debtor  a  late  financial  statement 
and  other  valuable  credit  information. 

Another  fundamental  principle  is  that  the  credit  man 
who  can  make  the  debtor  feel  that  the  account  ought 
to  be  paid  has  a  splendid  chance  to  get  his  money 
quickly.  This  can  sometimes  be  accomplished  by  ap- 
pealing to  the  debtor's  pride  in  his  business  honor  or 
to  his  anxiety  as  to  his  credit  standing.  Then,  too,  the 
assumption  of  a  friendly  and  ready  to  help  attitude 
usually  wins  the  good  will  and  confidence  of  the 
debtor  and  paves  an  easy  way  for  obtaining  payments. 
To  accomplish  this,  dignity  and  firmness  need  not  be 
sacrificed. 

ACTUAL    PROCEDURE 

The  actual  procedure  in  any  particular  case,  as  we 
have  previously  pointed  out,  depends  largely  on  the 
situation  of  the  customer.  Let  us  assume  that  a  debtor 
is  in  fair  condition  and  apparently  has  the  confidence  of 
the  trade.  In  such  a  case  a  statement  is  sent  a  few 
days  after  the  bill  is  due.  After  allowing  a  reasonable 
time  for  reply,  a  letter,  similar  to  the  following,  could 
be  sent. 

"Enclosed  you  will  find  a  duplicate  statement  of 
your  account,  which  became  due  on . 

"No  doubt  our  previous  statement  must  have  es- 
caped your  attention,  or  it  may  be  that  a  check  is 
already  on  the  way." 

If  no  answer  were  received  to  the  above  within 
reasonable  mailing  time,  a  second  letter  could  be  sent, 
as  follows : 


264         CREDITS  AND  COLLECTIONS 

"We  are  quite  surprised  that  you  have  allowed  the 
enclosed  past  due  account  to  remain  unpaid.  It  will 
be  to  our  mutual  advantage  for  you  to  send  a  check 
by  return  mail.  In  any  event,  we  shall  look  for- 
ward to  hearing  from  you  within  the  next  few 
days." 

If  this  letter  brings  no  response,  the  next  step  might 
be  to  draw  on  the  customer  and,  at  the  same  time,  to 
write  a  letter  of  the  following  tenor : 

"We  have  written  you  twice  about  the  enclosed 
account,  and,  somewhat  to  our  surprise,  have  heard 
nothing  from  you. 

"Probably  you  prefer  to  pay  this  item  by  having 
us  draw  on  you.  Acting  on  this  assumption,  which 
we  trust  is  correct,  we  are  depositing  a  draft  in 
our  bank  which  will  be  presented  to  you  in  due 
course. 

"W^ill  you  kindly  be  prepared  to  pay  this  draft 
when  you  receive  it." 

If  the  draft  is  returned  unpaid,  and  no  word  is 
received  from  the  debtor,  the  next  letter,  which  should 
be  based  on  the  notation  on  the  returned  draft,  might 
be  along  the  following  lines : 

"We  are  really  at  a  loss  to  understand  the  reason 
for  your  failure  either  to  answer  our  letters  about 
the  payment  of  enclosed  account  or  to  pay  our  re- 
cent draft,  which  was  returned  endorsed,  'Cannot 
pay  now.'  We  sincerely  hope  that  this  does  not 
mean  that  you  are  meeting  with  any  difficulties  in 
your  business.    However,  if  this  should  be  the  case, 


COLLECTIONS  265 

you  can  depend  on  us  to  co-operate  with  you  in 
every  reasonable  manner  possible.  If  you  feel  that 
you  require  a  further  extension  of  time  to  meet  this 
bill,  do  not  hesitate  to  place  before  us  the  entire 
facts. 

"On  the  other  hand,  if  you  are  in  a  position  to  do 
so,  we  trust  that  you  will  send  a  check  immediately. 
When  we  checked  through  your  order,  we  confi- 
dently expected  you  would  pay  the  bill,  as  you  had 
agreed,  as  soon  as  it  became  due,  unless,  of  course, 
unforeseen  contingencies  should  arise.  To  disre- 
gard the  obligation  imposed  on  you  by  the  terms  of 
our  agreement,  without  offering  any  reason  therefor, 
is  bound  to  reflect  on  your  credit  standing. 

"We  want  you  to  feel  that  you  can  at  all  times 
rely  on  our  co-operation  and  fair  treatment,  and  we 
confidently  expect  the  same  of  you.  A  prompt  re- 
sponse from  you  will  help  avoid  any  further  mis- 
understanding." 

Probably  in  most  cases  the  above  correspondence 
would  have  elicited  some  response  from  the  debtor ;  but 
if  no  answer  is  received  to  the  last  letter,  the  credit 
man  should,  in  taking  the  next  step,  be  governed  by 
his  knowledge  of  the  standing  of  the  debtor,  as  re- 
flected by  his  own  experience  and  the  credit  reports. 
If  necessary  the  credit  information  should  be  brought 
up  to  date.  In  seeking  information  at  this  time,  how- 
ever, discretion  should  be  exercised  to  avoid  unduly 
exciting  apprehension  among  other  creditors.  It  may 
be  timely  now  to  draw  a  report  from  the  local  attor- 
ney.   The  attorney  should  be  asked  specifically  if  any 


266         CREDITS  AND  COLLECTIONS 

suits  have  been  filed  against  the  debtor.  The  knowl- 
edge gained  from  this  investigation  will  enable  the 
credit  man  to  plan  intelligently  the  future  treatment 
of  the  account. 

Assuming  the  investigation  brings  to  light  no  un- 
usual developments,  a  letter,  insisting  upon  payment, 
could  be  written  somewhat  in  the  following  fashion : 

"You  have  apparently  paid  no  attention  to  our 
last  letter,  nor  to  several  that  preceded  it,  about  the 
enclosed  account.  Frankly,  we  cannot  understand 
why  you  have  failed  to  reply  to  these  letters,  for 
surely  you  must  realize  how  seriously  this  reflects 
upon  your  credit  standing. 

"We  sincerely  hope  that  you  will  not  compel  us 
to  take  any  further  steps  to  collect  this  account. 
At  the  same  time  you  must  know  that  it  is  not  good 
business  policy  for  any  house  to  continue  writing 
letters  indefinitely;  and  the  account  is  now  so  long 
past  due  that  we  must  insist  upon  hearing  from 
you  by  return  mail." 

Following  this  letter  by  a  telegram  is  often  effective. 
Such  a  telegram  might  read : 

"Are  you  remitting.  Must  have  your  answer 
immediately." 

The  next  letter  should  warn  the  debtor  that  unless 
the  account  is  paid  more  severe  measures  will  be  taken 
or  that  the  account  will  be  placed  in  the  hands  of  an 
attorney.  However,  a  threat  to  call  upon  an  attorney 
should  never  be  made  unless  there  is  every  intention 
to  carry  out  the  threat.    Nor  should  this  step  be  taken 


COLLECTIONS  2.6^ 

until  every  other  effort  to  collect  has  failed  and  the 
creditor  is  prepared  to  sever  all  business  relations  with 
the  debtor. 

Before  writing  a  letter  of  this  character,  if  the  ac- 
count is  large  enough  and  a  previously  valued  one,  and 
if  the  debtor's  location  is  not  too  far  distant,  more 
satisfactory  results  may  often  be  obtained  by  making 
a  personal  visit  to  the  debtor's  place  of  business.  A 
full  explanation  of  the  reason  for  the  delinquency  can 
be  procured  more  easily,  an  investigation  into  the  debt- 
or's affairs  made,  payment  obtained,  the  confidence  of 
■die  debtor  won,  and  possibly  a  satisfactory  basis  for 
the  continuation  of  business  relations  arranged.  These 
results  could  hardly  be  expected,  even  by  the  most 
optimistic  credit  man,  from  any  other  method  of  pro- 
cedure. 

If  a  personal  call  is  found  impracticable,  a  letter 
along  the  following  lines  could  be  sent. 

"On  ,  we  sent  you  the  following  telegram, 

'Are  you  remitting?  Must  have  your  answer  imme- 
diately.' You  have  seen  fit  to  ignore  this  telegram 
as  well  as  the  many  letters  we  have  sent  you  about 
your  account. 

"You  will  agree  with  us  in  the  belief  that  we 
have  been  very  lenient  and  patient  with  you.  How- 
ever, under  the  circumstances  we  cannot  possibly 
carry  your  account  any  longer,  and  you  leave  us  no 
choice  but  to  turn  this  account  over  to  our  attorneys 
for  collection. 

"This  is  a  step  that  we  have  delayed  as  long  as 
possible,   in  the  hope  that  you   would   realize  the 


268         CREDITS  AND  COLLECTIONS 

gravity  and  danger  of  such  an  action  being  taken, 
and  the  unfavorable  effect  this  would  have  on  your 
credit  standing.  We  sincerely  hope  that,  for  your 
own  good,  you  will  not  compel  us  to  take  any  fur- 
ther action. 

"However,  unless  a  remittance  is  received  from 

you  before we  shall  be  obliged,  much  against 

our  own  wishes,  to  place  the  account  in  the  hands 
of  our  attorney." 

If  no  remittance  is  forthcoming  by  the  date  men- 
tioned in  the  above  letter,  the  creditor  should  not  delay 
in  carrying  out  the  threat  made.  This  might  be  done 
either  by  turning  the  account  directly  over  to  an  attor- 
ney or  by  drawing  on  the  debtor  and  sending  the  draft 
to  a  local  bank,  with  instructions  to  turn  the  draft 
over  to  a  local  attorney  in  case  it  is  not  paid.  At  the 
same  time  the  local  attorney  should  be  informed  of 
the  circumstances  and  instructed  what  to  do  if  the 
draft  is  referred  to  him.  The  debtor  should  also  be 
advised  of  what  is  being  done,  and  informed  that  un- 
less the  draft  is  honored  the  account  will  automatically 
be  turned  over  to  an  attorney. 

Drafts  issued  by  certain  collection  agencies  and  law 
list  publishers  are  very  useful  for  this  purpose.  These 
drafts  have  attached  to  them  stubs  instructing  the 
bank  to  hand  the  draft  to  an  attorney  named  on  the 
stub  if  the  draft  is  not  paid.  This  has  the  advantage 
of  compelling  the  debtor's  attention  to  the  fact  that 
unless  he  pays,  the  threatened  action  will  be  carried 
out.  He  also  realizes  that  the  attention  of  the  local 
bank  has  been  directed  to  the  situation,  with  the  pos- 


COLLECTIONS 


269 


W<lak.ll>«i 


INSTRUCTIONS    TO    BANK. 

(To  be  torn  off  b«for«  pnMntins J 

GcntUmen: 

If  att<uh£d  draft  on  the  d^btornamed  herein  is  paid  at  maturity,  PLEASE  REMIT  PROCEEDS 
EMRECT  TO  THE  UNDERSIGNED. 

IF  NOT  PAID»  please  promptly  deli-jer  or  mail  sam<  in  enilosed  stamped  and  addressed  envelop^  to 
the  attorney  named  below.     DO  NOT  PRGTEST. 


Uotdins  Botui  of  U>«  U.  S.  P.  uid  G.  Ca 


To 

LETTER    OF    ADVICE    TO    ATTORNEY. 
M,Dtif7ii>(  •  HoM<r  of  the  Bona  <A  lli«  Uulxl  SUtu  FidelitT  ud  Cuarantr  Caoqiur. 

ATTOXNSV. 

Dear  Sir :— Payment  of  annexed  Draft  having  been  refused,  you  are  hereby  authoritei  to   take 
prompt  action  for  its  collection  on  the  terms  stipulated  on  He  batk  hereof.     Promptly  acknowledge  receipt 
and  advise  what  course  is  best  to  pursue.      Wire,  if  in  your  opinion  the  circumstantes  warrant. 

Respectfully, 

RCMIT  ALL  MONEYS  COLLECTED 

BY    P.  0.   MONEY    OnOEH.   BANK 

EXCHANGE    OH    EXPRESS. 

>0  NOT  DITACH  PROM  DRAFT. 

ylddre^t 

«r. 

UoJdlDC  Bood  or  Uoitnl  SUitM  Pia«Uty  And  Gtunatj  C&, 

BAltlmoiAMd. 

DRAFT  OP  A  HOLDER  OP  THE  BOND  OP  THE 

UNITED  STATES  FIDELITY  AND  GUARANTY  COMPANY'S 

DEPARTMENT  OF  GUARANTEED  ATTORNEYS. 

Total  Reaourees,  Over  $9,000,000.  Home  Office,  BALTIMORE,  MD. 


.19 


At^ 


^ight,  Pay  to  the  order  of  the. 
^the  sum  of. 


_Bank  of 
.Dollars, 


Value  received  and  charge  to  account  of 


To. 


Address^ 


Address- 


Boldiox  Bded  at  UnH«l  S 


PATCNTCO  IN  THI  U.  S.  tMLt  *l,  I»I4. 


sible  result  that  his  local  credit  will  be  seriously  im- 
paired. The  debtor  who  wishes  to  avoid  either  of 
these  unpleasant  results  will  honor  the  draft. 

On  the  other  hand,  there  are  some  serious  objec- 
tions to  informing  the  local  bank  of  the  delinquency 


27©         CREDITS  AND  COLLECTIONS 

of  the  debtor  and  the  necessity  for  drastic  action.  Fre- 
quently, whether  or  not  any  one  creditor  will  be  able 
to  collect  depends  largely  upon  the  other  creditors' 
general  knowledge  of  the  debtor's  weak  condition. 
This  knowledge  is  quite  certain  to  become  more  gen- 
eral by  calling  the  attention  of  the  bank  to  the  debtor's 
weakness.  This  may  result  in  numerous  demands  for 
payment  and  a  shutting  off  of  the  debtor's  credit  by 
the  bank  and  other  creditors,  only  to  precipitate  the 
insolvency  or  bankruptcy  of  the  debtor.  For  his  own 
interests,  the  creditor  desires  to  avoid  such  conse- 
quences, and  will  hesitate  to  direct  the  bank's  atten- 
tion to  the  condition  of  the  debtor's  account,  especially 
where  the  amount  is  very  large.  Probably  in  such  a 
case  it  would  be  better  for  the  creditor  to  get  in  direct 
touch  with  the  local  attorney.  The  attorney  can  then 
investigate  the  situation,  have  a  conference  with  the 
debtor  and  advise  the  course  of  action  to  be  taken. 


WEAK    DEBTORS 

If,  during  the  course  of  the  above  correspondence, 
the  creditor  discovers  that  the  debtor  is  in  a  compara- 
tively weak  condition,  but  apparently  has  the  confi- 
dence of  the  trade,  drastic  action  should  not  be  taken. 
This  is  especially  true  where  a  large  sum  is  owing  to 
the  creditor.  By  exercising  patience,  and  extending 
an  additional  small  line  of  credit  so  that  the  debtor  can 
replenish  his  stock,  the  creditor  may  find  everything 
will  turn  out  satisfactorily.  However,  no  such  course 
should  be  followed  until  the  debtor  has  fully  and 
frankly  disclosed  his  affairs  to  the  creditor,  and  unless 


COLLECTIONS  271 

there  is  every  evidence  of  character  and  capacity,  and  a 
sufficient  basis  of  hope  for  the  recovery  of  the  debtor. 
If  in  such  a  case  the  creditor  were  to  insist  on  pay- 
ment, the  downfall  of  the  debtor  might  be  precipitated, 
with  the  usual  result  of  bankruptcy  and  a  few  cents  on 
the  dollar  for  the  creditor.  Contrasted  with  this,  if 
the  creditor  is  forbearing  and  supplies  the  debtor  with 
more  merchandise,  risking  a  few  dollars  more,  the 
debtor  who  possesses  character  and  capacity  has  a 
good  chance  to  recover,  with  profit  to  himself  and  his 
creditors.  The  creditor,  farsighted  enough  to  follow 
this  course,  will  be  paid  in  full,  and  further  will  gain 
the  good  will  and  future  business  of  the  debtor.  Ex- 
cellent judgment  must  be  exercised,  however,  to  avoid 
"throwing  good  money  after  bad." 

Where,  on  the  other  hand,  the  customer  is  found  to 
be  in  bad  financial  condition,  going  backward  and  los- 
ing the  confidence  of  the  trade,  and  there  are  other 
earmarks  of  an  unavoidable  failure  present,  the  cred- 
itor should  pursue  quite  a  different  course.  Where 
these  conditions  exist,  it  is  found  that  the  debtor's 
credit  is  being  shut  off  in  many  quarters,  and,  needing 
certain  merchandise,  the  debtor  is  paying  cash  for  some 
of  his  supplies.  Moreover,  in  a  final  effort  to  stave 
off  the  inevitable  failure,  such  a  debtor  invariably  pays 
the  most  insistent  creditors.  Under  these  circum- 
stances strenuously  to  insist  upon  payment  is  the  most 
practical  course  for  the  creditor  to  take.  Many  of  the 
letters  and  steps  suggested  in  the  procedure  outlined 
above  should  be  eliminated  and  the  issue  immediately 
forced,  though  it  is  found  necessary  to  place  the  ac- 
count for  collection  without  much  delay. 


272         CREDITS  AND  COLLECTIONS 

NOTES 

When  a  debtor  offers  to  pay  his  past  due  account 
by  note,  there  are  several  questions  for  the  creditor 
to  consider  before  accepting  the  note  in  settlement. 
There  are  possibly  three  arguments  in  favor  of  the 
note.  First,  a  note  serves  as  practically  conclusive 
evidence  of  the  debt  and  facilitates  proof  in  case  it  is 
subsequently  necessary  to  sue  the  debtor.  Second,  a 
debtor  may  consider  a  note  a  more  solemn  obligation 
than  the  open  account.  He  realizes,  for  example,  that 
a  note  may  be  discounted  at  a  bank  and  presented  by 
the  bank.  For  this  reason,  he  may  be  more  apt  to  be 
prepared  to  meet  the  note  than  to  pay  on  the  open 
account  on  any  fixed  date.  Third,  a  note  may  be  more 
easily  transferred  and  realized  on  by  the  creditor. 

The  soundness  of  the  last  two  arguments  is  seri- 
ously and  probably  correctly  questioned  by  many  credit 
grantors,  who  offer  a  number  of  important  objections 
to  the  acceptance  of  a  note  in  payment  of  a  past  due 
account.  These  objections  may  be  catalogued  as 
follows : 

First.  A  note,  especially  of  a  retailer,  is  not  always 
paid  when  due;  and  usually  the  debtor  offers  to  pay 
only  part  of  the  note  on  its  due  date,  tendering  another 
note  for  the  balance. 

Second.  Ordinarily  the  open  account  is  paid  more 
promptly  than  the  note  or  its  renewals,  especially 
where  part  payments  are  accepted  from  time  to  time 
on  the  open  account. 

Third.  For  a  creditor  to  accept  a  note  serves  as  a 
very  bad  precedent.     As  a  rule,  when  several  notes 


COLLECTIONS  273 

have  been  accepted  by  a  creditor,  he  will  find  it  diffi- 
cult to  obtain  any  other  form  of  payment  from  the 
debtor. 

Fourth.  The  creditor,  by  accepting  a  note,  waives 
all  right  to  expect  or  demand  payment  until  the  due 
date  of  the  note.  In  case  any  immediate  action,  such 
as  the  bringing  of  a  lawsuit  to  enforce  payment,  were 
considered  desirable,  the  creditor  would  have  to  post- 
pone this  action  until  after  the  note  became  due. 

Fifth.  By  refusing  to  accept  a  note,  the  creditor 
can  often  gain  the  good  will  and  esteem  of  the  debtor, 
for  the  debtor  is  very  gratified  to  be  led  to  believe 
that  this  refusal  shows  greater  confidence  in  him. 

All  of  these  objections  should  be  considered  by  the 
creditor  before  he  accepts  a  debtor's  note.  Probably 
it  is  usually  better  for  the  creditor  to  allow  the  debtor 
to  make  payments  from  time  to  time  on  the  open 
account.  If,  however,  a  note  is  thought  to  be  more 
desirable,  better  results  may  be  obtained  by  employing 
an  installment  note,  which  provides  for  the  payment 
of  small  amounts  from  time  to  time,  on  condition, 
however,  that  the  entire  amount  shall  become  due  and 
payable  in  case  of  default  of  any  installment. 
Wherever  possible,  the  creditor  should  have  the  debtor 
procure  some  responsible  party  as  endorser  for  the 
note.  This  adds  considerably  to  the  creditor's  security, 
and  makes  the  payment  of  the  note  much  more  certain, 

ATTORNEYS 

As  we  have  previously  mentioned,  an  account  should 
not  be  placed  in  an  attorney's  hands  for  collection  until 


274         CREDITS  AND  COLLECTIONS 

all  other  means  have  been  exhausted  and  unless  the 
creditor  is  prepared  to  sever  his  business  relations  u^ith 
the  debtor.  At  the  same  time,  it  is  v^^ell  to  remember 
that  the  older  an  account  becomes,  the  more  difficult  it 
is  to  collect,  and  for  that  reason,  v^hen  circumstances 
warrant,  the  creditor  should  not  hesitate  to  seek  legal 
redress. 

When  an  account  is  given  to  an  attorney,  he  should 
be  instructed  to  proceed  promptly  and  vigorously  in  an 
attempt  to  collect  without  suit.  \\' here  the  attorney 
succeeds  in  obtaining  payment  without  suit,  a  charge 
of  usually  io%  is  made  for  sums  up  to  approximately 
three  hundred  dollars  and  for  larger  sums  a  propor- 
tionately smaller  charge  is  made.  The  bringing  of  a 
lawsuit  adds  considerably  to  the  expense  involved,  so 
that  if  the  circumstances  warrant  it,  the  attorney 
should  make  every  reasonable  effort  to  collect  before 
filing  a  suit.  It  is,  in  many  cases,  better  to  accept 
installments  from  the  debtor  than  to  bring  suit. 

A  good  collection  attorney  will  acknowledge  the 
receipt  of  the  claim  as  soon  as  it  is  received  by  him. 
He  will  then  immediately  attempt  to  settle  the  case 
without  going  to  law.  If  this  is  impossible  he  will 
advise  the  creditor  whether  or  not  a  suit  Is  expedient, 
depending  largely  upon  the  probability  of  proving  the 
claim  and  of  collecting  any  judgment  which  might  be 
obtained.  Through  sundry  devices,  various  debtors 
render  themselves  "judgment  proof,"  and  it  would  be 
obviously  unwise  to  go  to  the  expense  of  suing  them. 
Then,  too,  the  debtor  may  have  either  a  large  counter- 
claim for  damages  or  a  valid  defense  to  the  action, 


COLLECTIONS  275 

or  there  may  be  too  many  difficulties  in  the  way  of 
proof. 

Good  collection  attorneys,  however,  are  not  always 
available;  in  many  small  western  and  southern  com- 
munities it  is  almost  impossible  to  obtain  satisfactory 
results  from  local  attorneys.  Very  frequently  these 
attorneys  are  neighbors  and  friends  of  the  debtor,  and 
their  efforts  to  collect  consist  largely  of  making  casual 
remarks  about  the  debt  to  the  debtor.  In  such  cases, 
it  is  always  better  to  engage  an  attorney  living  in  an 
adjacent  larger  town  or  city.  Other  attorneys,  lack- 
ing any  semblance  of  office  system,  are  wont  to  allow 
a  claim  to  drag  along  without  taking  any  aggressive 
steps  to  collect,  and  it  is  necessary  for  the  credit  man 
to  keep  everlastingly  after  these  attorneys  in  an  effort 
to  get  regular  reports  about  the  progress  of  the  col- 
lection. 

The  question  naturally  arises.  How  is  the  credit  man 
to  obtain  the  names  of  attorneys  who  have  the  ability 
to  collect  and  who  will  be  responsible  for  any  money 
collected?  To  aid  the  credit  man  in  the  selection  of 
such  an  attorney  several  concerns  publish  lists  of  law- 
yers, which  we  have  previously  mentioned  in  the  chap- 
ter on  Sources  of  Information.  Some  of  these  pub- 
lishing concerns  stand  responsible  for  any  claims  col- 
lected by  any  attorney  listed  in  the  book,  provided  the 
creditor  notifies  the  publisher  of  the  list  or  otherwise 
complies  with  the  requirements  of  the  publisher.  These 
lists  are  referred  to  as  "bonded  attorney  lists"  or 
"guaranteed  attorney  lists."  The  publishers  of  some 
of  these  lists  go  so  far  as  to  rate  each  attorney  in  the 
book  according  to  his  estimated  financial  worth,  char- 


276         CREDITS  AND  COLLECTIONS 

acter,  legal  ability  and  promptness  in  paying  claims 
collected. 

While  the  publishers  of  these  lists  make  every  effort 
to  select  attorneys  who  will  be  satisfactory  to  creditors 
in  the  collection  of  claims,  there  is  no  assurance  that 
these  attorneys  will  perform  their  work  promptly  and 
efficiently.  Therefore,  many  credit  men,  especially  in 
the  larger  houses,  compile  their  own  lists  of  attorneys. 
The  names,  in  such  a  case,  are  usually  first  obtained 
from  the  various  law  lists,  and  subsequently  investi- 
gated as  to  character  and  capacity  as  thoroughly  as  the 
ordinary  credit  seeker  is  investigated. 

FORWARDING   LAWYERS 

Some  credit  men  prefer  to  place  all  claims  in  the 
hands  of  one  lawyer  located  in  the  same  city.  This 
lawyer,  who  is  usually  a  specialist  in  handling  collec- 
tions, then  forwards  the  claim  to  a  correspondent  at- 
torney in  the  locality  of  the  debtor.  The  fee  in  this 
case,  which  is  no  larger  than  where  the  claim  is  sent 
direct,  is  divided  between  the  two  attorneys,  the  for- 
warding lawyer  retaining  usually  one-third. 

The  advantages  set  forth  for  this  plan  are  two- 
fold. First,  the  creditor  is  relieved  of  the  necessity  of 
constantly  prodding  the  distant  attorney,  for  the  first 
lawyer  usually  has  a  carefully  planned  system  to  fol- 
low up  the  status  of  the  collection.  This,  however,  is 
true  to  a  very  limited  extent,  for  the  credit  man  is 
anxious  to  keep  informed  as  to  the  progress  of  the 
account  and,  therefore,  will  correspond  continually 
with  the  first  lawyer.     This  In  reality  necessitates  a 


COLLECTIONS  2^^ 

duplication  of  correspondence.  In  the  second  place, 
it  is  contended  that  the  lawyer,  because  he  has  occa- 
sion to  forward  more  claims  for  collection  than  the 
average  creditor,  is  in  a  better  position  to  become  more 
familiar  with  the  ability  of  the  correspondent  attor- 
neys. Therefore,  it  is  argued,  more  satisfactory  serv- 
ice may  be  had.  On  the  other  hand,  it  is  claimed  that 
the  correspondent  attorney  will  not  give  as  close  atten- 
tion to  the  claim,  because  he  must  divide  his  fee  with 
the  forwarding  lawyer. 

COLLECTION    AGENCIES 

Many  credit  men  prefer  to  utilize  the  services  of 
a  collection  agency  in  place  of  a  local  lawyer.  The 
agencies,  before  forwarding  an  account  to  its  corre- 
spondent attorney,  usually  write  a  reries  of  letters  de- 
manding payment.  In  other  respects  their  work  of 
collecting  an  account  is  very  similar  to  that  of  the 
local  lawyer,  and  many  of  the  same  arguments  in 
favor  of  and  against  their  use  apply.  Probably  most 
of  the  agencies  are  more  systematic  than  lawyers  in 
following  up  a  collection.  However,  there  are  liter- 
ally thousands  of  irresponsible  collection  agencies,  and 
a  credit  man  should  thoroughly  investigate  an  agency 
or,  if  necessary,  require  a  bond  to  cover  the  amount  of 
the  claim  before  placing  an  account  in  its  hands  for 
collection.  In  dealing  with  the  larger,  well  established 
agencies,  the  credit  man  need  have  no  apprehension 
about  the  responsibility.  Another  argument  in  favor 
of  the  large  agencies  and  trade  bureaus  is  the  power- 
ful moral  effect  on  the  debtor.     The  average  debtor 


THE  ASSOCIATION  OF  BONDED  ATTORNEYS 
Home  Office  :   Milwaukee,  Wisconsin 

An   Association  of   Merchants   and  Attorneys   Or- 
ganized FOR  the  Protection  of  Creditors 

To 191  •• 


The  undersigned  is  a  member  of  the  above  Associa- 
tion and  enjoys  its  fullest  protection.  Under  the  terms 
of  membership  it  is  required  that  all  claims  against  de- 
linquent debtors  be  placed  in  the  hands  of  local  attor- 
neys for  prompt  and  vigorous  action.  Your  immediate 
remittance   direct   to  us   of   the  amount   of  your   now 

overdue        .,  which   ^    •.,       interest  is  $ , 

will  render  it  unnecessary  to  place  this  claim  with  the 
Association's  attorney  in  your  town. 

Respectfully  yours, 

REPLY  ^lUST  CO^IE  BY  RETURN  MAIL  TO 


Dunning  Form  No.  i 

THE  ASSOCIATION  OF  BONDED  ATTORNEYS 

Home  Office  :    IMilwaukee,  Wisconsin 

An  Association  of  ]\Ierchants  and  Attorneys   Or- 
ganized for  the  Protection  of  Creditors 

To 191  •• 


Under  the  regulations  of  the  above  Association,  a 
second  and  final  notice  is  hereby  given  you  that,  unless 
remittance  be  made  immediately,  direct  to  us,  in  pay- 
ment of  your  past  due  account,  the  claim  will  be  given 
to  local  attorneys  in  your  town  for  collection.  The 
requirements  of  the  Association  render  it  imperative 
that  no  indulgence  be  granted  by  its  attorneys,  so  you 
will  save  trouble  and  expense  by  immediate  payment. 
PLEASE  REMIT  $ IN  FULL  PAY- 
MENT BY  RETURN  MAIL  TO 
Yours  truly, 

Dunning  Form  No.  2 
«78 


COLLECTIONS  279 

knows  that  if  he  fails  to  pay  an  account  placed  in  the 
hands  of  one  of  these  agencies  the  entire  business  com- 
munity may  learn  of  it  and  his  credit  will  consequently 
suffer.  For  that  reason  the  debtor  is  apt  to  make 
every  effort  to  meet  the  claim.  On  the  other  hand,  it 
may  be  reasoned  by  the  creditor  that  to  have  this 
information  concerning  a  debtor  passed  on  to  other 
creditors  would  endanger  the  account  and  materially 
weaken  the  possibility  of  collecting  it. 

COLLECTION  AGENCY  FORMS 

Many  collection  agencies,  law  list  publishers,  trade 
organizations,  and  collection  letter  concerns  have  de- 
vised a  series  of  blank  forms  or  "collection  letters." 
These  forms,  which  bear  the  name  of  the  agency,  are 


Established  1868  Incorporated  1891 

General  Offices,  Woolworth  Building,  New  York 
THE  MARTINDALE  MERCANTILE  AGENCY 
To 

Dear  Sir :     Please  remit  direct  to  the  undersigned,  or 

call  on  them  and  settle  (        ^^  ^       ) 

amounting  at  present  date    (principal  and  interest)    to 

$     

By  settling  this  at  once  you  will  save  us  the  trouble, 
and  yourself  the  expense  and  embarrassment  of  having 
it  placed  in  the  hands  of  our  Attorney. 

Signed 

Subscriber  to  the  Martindale 
Mercantile  Agency 

Street  and  No. 
City 
Date 19. 


28o         CREDITS  AND  COLLECTIONS 

sold  or  given  to  creditors,  who,  when  the  occasion 
arises,  fill  in  the  blanks  and  send  them  to  delinquent 
debtors.  The  intention  is  to  impress  the  debtor  with 
the  idea  that  these  blanks  are  sent  by  the  agency,  and 


Collection  Letter  of  a  holder  of  the  bond  of  the 
UNITED   STATES   FIDELITY  AND  GUARANTY 

COMPANY 

Issued  by  the  Department  of  Guaranteed  Attorneys, 

Home  Office,  Baltimore,  Md. 

John  R.  Bland,  Pres. 

Capital  paid  in  cash,  $2,000,000. 

Total  resources,  over  $8,750,000. 

19 

To 

The  amount  of  your  overdue  {  "^^^e^^^  }{ -IJ^^  J 

interest  is  $ 

The  undersigned  begs  to  advise  that  immediate  set- 
tlement will  obviate  the  necessity  of  placing  this  claim 
for  prompt  action  in  the  hands  of  an  Attorney  who  will, 
on  our  notice,  be  covered  by  the  bond  of  the  United 
States  Fidelity  and  Guaranty  Company,  which  we  hold. 

Holding  bond  of  United  States 

Fidelity  and  Guaranty  Company 

No Street 

City  State 


that   unless   payment   is   received   immediately,    more 
drastic  action  is  to  be  expected. 

These  forms  recommend  themselves  to  many  credit 
men  on  account  of  the  lack  of  expense  and  work  in 
using  them.  However,  they  should  be  used  only  as  an 
alternative  or  preliminary  step  to  sending  an  account 


COLLECTIONS  281 

to  an  attorney.  Their  use  should  be  deferred  until 
all  other  means  for  collecting  the  account  have  been 
exhausted.  In  fact,  these  blanks  are  not  the  most 
satisfactory  form  in  which  to  demand  payment  unless 
the  account  is  thought  undesirable  and  unless  the  cred- 
itor is  prepared  to  sever  business  relations  with  the 
debtor.  In  general  it  is  usually  well  to  avoid  form 
letters,  that  is  to  say,  printed  or  mimeographed  letters, 
for  their  use  suggests  either  a  lack  of  serious  interest 
in  the  debtor,  or  that  slow  payments  are  not  unusual. 
Of  course,  no  creditor  desires  to  create  either  of  these 
impressions. 

SPECIAL  PROBLEMS  IN   COLLECTIONS 

In  the  work  of  collecting  accounts,  the  credit  man 
must  decide  some  difficult  questions  of  business  pol- 
icy and  at  times  overcome  many  tricks  resorted  to  by 
some  debtors.  For  example,  there  is  the  question  of 
whether  or  not  interest  should  be  charged  on  past  due 
accounts.  What  should  be  done  when  the  debtor  takes 
excessive  or  unearned  discounts  off  the  face  amount  of 
the  bill?  How  should  an  unsigned  or  defective  check 
sent  by  the  debtor  be  handled?  Each  of  these  ques- 
tions is  worthy  of  serious  consideration. 

INTEREST   ON    PAST   DUE   ITEMS 

There  can  be  no  question  but  that  there  is  every 
justification  for  charging  interest  on  accounts  which 
run  past  the  date  of  maturity.  Definite  terms  are  fixed 
at  the  time  the  sale  is  consummated.     The  seller  ex- 


282         CREDITS  AND  COLLECTIONS 

pects  to  receive  payment  on  or  before  the  due  date, 
and  with  this  in  mind  he  determines  prices.  If  the 
purchaser  does  not  pay  when  the  bill  is  due,  the  seller 
loses  interest  on  the  amount  outstanding  and  his  profits 
suffer.  In  reality,  by  holding  on  to  the  money  after 
the  account  becomes  due,  the  debtor  is  borrowing 
money  from  the  creditor  without  the  creditor's  con- 
sent. If  the  debtor  borrowed  money  elsewhere  he 
would  have  to  pay  interest,  and  if  the  creditor  loaned 
his  funds  elsewhere  he  would  receive  interest.  Cer- 
tainly, then,  the  debtor  should  be  required  to  pay  inter- 
est on  past  due  items. 

To  view  this  question  from  another  angle,  if  the 
creditor  were  not  to  charge  interest  he  would  be  dis- 
criminating between  customers,  and  treating  the 
prompt  payers  unfairly.  The  customer  who  pays  his 
bills  promptly  often  finds  it  necessary  to  borrow  money 
from  his  banker  in  order  to  be  prompt.  Another  cus- 
tomer, who,  instead  of  borrowing  the  money  at  his 
bank,  compels  the  seller  to  carry  his  account,  is  buy- 
ing his  merchandise  cheaper  than  the  prompt  paying 
customer  to  the  extent  of  the  interest  he  would  have 
to  pay  the  bank.  If  then  the  creditor  does  not  charge 
interest,  the  "prompt  pay"  customer  suffers  a  serious 
disadvantage,  and  a  premium  is  placed  upon  slowness 
In  justice  to  all  concerned,  interest  on  past  due  ac- 
counts must  be  charged. 

COLLECTING    INTEREST 

Many  houses  find  they  are  able  to  collect  interest  by 
printing  on  all  statements  words  to  the  effect  that  in- 


COLLECTIONS  283 

terest  is  charged  on  all  past  due  accounts,  and  by  actu- 
ally adding  the  interest  to  the  amount  of  the  invoice  on 
statements  of  past  due  items.  Other  houses  simply 
attach  a  printed  sticker  to  past  due  statements,  and  in 
case  interest  is  not  included  in  the  remittance  from  the 
debtor  a  bill  for  interest  is  sent.  Some  houses  have 
found  that  calling  the  attention  of  the  customer  to  the 
fact  that  he  will  save  interest  by  remitting  promptly 
has  stimulated  more  prompt  payment. 

THE  UNEARNED  DISCOUNT  ABUSE 

Another  serious  question  with  which  credit  men 
have  to  deal  is  the  unearned  discount  evil.  As  we  have 
previously  explained  in  the  chapter  on  Mercantile 
Credit,  cash  discount  is  a  premium  given  to  the  debtor 
for  payment  within  a  certain  time,  usually  within  ten 
days  after  the  date  of  the  invoice.  The  debtor  is  en- 
titled to  this  discount  only  when  he  remits  within  the 
specified  time.  Nevertheless,  there  are  many  debtors 
who  remit  from  ten  to  sixty  days  after  the  discount 
period  has  elapsed  and  who  then  have  the  audacity  to 
deduct  the  discount.  On  this  question  of  unfairly  de- 
ducting discounts  we  quote  a  leaflet  of  the  National 
Association  of  Credit  Men. 

Any  strain  unnecessarily  imposed  upon  the  sound 
and  reciprocal  relationship  that  should  exist  between 
the  buyer  and  seller  of  commodities  is  a  direct  vio- 
lence upon  the  good  order  and  safety  of  business. 
One  of  the  most  common  causes  of  strain  is  that 
imposed  by  buyers  in  deducting,  at  the  time  of  set- 


284         CREDITS  AND  COLLECTIONS 

tlement,  discounts,  directly  violating  sale  terms  and, 
through  such  deductions,  reading  into  the  sale  con- 
tract concessions  that  were  neither  agreed  upon  nor 
considered  at  the  time  orders  were  placed. 

Such  practice  cannot  be  justified  by  any  apology 
or  explanation;  it  has  been  condoned  through  the 
pressure  of  competition  and  allowed  to  increase 
through  neglect,  but  every  violation  disturbs  the 
good  order  of  business  and  suggests  and  in  some 
directions  is  deemed  justifiable  grounds  for  recip- 
rocal unfairness.  It  is,  indeed,  commercial  bHndness 
to  presume  that  the  unwarranted  may  be  indulged 
in  by  one  party  alone  to  a  contract,  or  that  one  un- 
fair act  may  not  suggest  another. 

Beyond  a  doubt,  a  direct  violation  of  the  good 
order  of  business  by  taking  unjust  discounts  is  quite 
unintended.  Perhaps  such  act  is  deemed  perfectly 
fair  and  justifiable  in  the  sales  transaction ;  but  if 
it  is  the  custom  of  the  purchasing  house  to  remit  on 
certain  dates,  deducting  on  its  settlement  days  dis- 
counts which  matured  earlier,  then  such  custom 
should  be  explained  at  the  time  of  purchase  and  the 
sales  terms  definitely  adjusted — if  the  selling  house 
is  willing  to  make  concessions. 

Or,  as  frequently  occurs,  a  shipment  is  in  transit 
beyond  the  discount  period,  and  it  may  not  appear 
to  be  good  business  to  remit  for  goods  when  in 
transit,  but  if  the  purchasing  house  is  the  recipient 
of  the  confidence  of  the  selling  house  through  the 
execution  of  the  order  and  deliver}--  of  goods  upon 
the  agreed  terms,  there  is  no  good  reason  why  recip- 
rocal confidence  should  not  be  granted  by  the  buy- 


COLLECTIONS  285 

ing  house  in  the  beHef  that  any  error  in  the  execu- 
tion of  the  order  will  be  promptly  corrected  and  any 
freight  allowance  given  in  the  sale  agreement  prop- 
erly adjusted,  especially  as  the  shipment  is  usually 
the  property  of  the  purchasing  house  upon  being 
delivered  to  the  common  carrier. 

There  is  no  justification  in  varying  discount  terms 
on  the  ground  that  the  time  required  for  the  transit 
of  the  shipment  exceeded  the  discount  period;  if 
the  purchasing  house  has  made  it  a  custom  not  to 
remit  for  invoices  until  goods  are  received  and  propn 
erly  checked,  then  this  custom  should  be  made  clear 
at  the  time  of  purchase  and  either  be  concurred  in 
or  declined  by  the  selling  house. 

We  want  this  little  leaflet  and  the  few  thoughts 
it  presents  upon  the  observance  of  discount  terms  to 
serve  as  an  appeal  for  good  business  practices;  we 
want  it  to  arouse  a  better  conscience  than  now  gen- 
erally prevails  in  the  observance  of  discount  terms, 
and  to  restore  that  relationship  of  equity,  fairness 
and  confidence  between  buyer  and  seller  which  will 
alone  prevent  disturbances  and  enable  us  to  progress 
along  proper  lines  as  a  nation  of  sound  traders. 

It  is  the  indulgence  in  little  annoyances  that  cre- 
ates, eventually,  the  greatest  disorders.  We  ear- 
nestly believe  that  our  progressive  merchants  should 
consider  in  all  fairness  of  mind  the  strain  that  the 
abuse  of  discount  terms  is  imposing  upon  our  com- 
mercial well-being  and  make  it  just  as  important  a 
rule  of  personal  conduct  not  to  violate  the  merchan- 
dise sale  contract  as  to  live  strictly  up  to  the  contract 
under  seal. 


286         CREDITS  AND  COLLECTIONS 

The  creditor  should  tactfully  but  firmly  insist  that 
the  debtor  live  up  to  the  terms  of  sale.  Whenever  a 
check,  with  the  unearned  discount  deducted,  is  received 
before  the  maturity  of  the  invoice,  probably  the  best 
practice  for  the  creditor  to  follow  is  to  return  the 
check,  so  that  the  debtor  will  have  the  privilege  of 
waiting  until  the  due  date  of  the  bill  to  remit  without 
deducting  a  discount.  When,  however,  the  check  with 
discount  deducted  is  received  after  the  maturity  of 
the  invoice,  the  creditor  has  his  option  of  returning  the 
check  or  retaining  it  and  sending  a  bill  for  the  discount 
unjustly  deducted. 

DEFECTIVE   REMITTANCES 

Sometimes  a  debtor  sends  a  remittance  which  is 
defective  in  one  way  or  other;  possibly  the  check  will 
be  for  an  incorrect  amount,  or  unsigned  or  omitted 
altogether.  This  may  be  due  to  an  honest  mistake,  or 
it  may  be  an  attempt  on  the  part  of  a  scheming  debtor 
to  delay  payment  a  little  longer.  In  either  event  the 
credit  man  can  so  handle  the  remittance  as  to  remedy 
the  mistake  or  to  prevent  the  wrongful  delay  without 
incurring  the  displeasure  of  the  debtor.  For  example, 
where  the  debtor's  "signature  is  missing  from  the  check, 
it  would  be  proper  for  the  creditor  to  deposit  the  check 
and  guarantee  the  signature,  at  the  same  time  writing 
the  debtor  of  what  has  been  done.  Or,  if  the  check  is 
for  an  incorrect  amount,  the  creditor  might  insert  the 
correct  amount,  and  guarantee  it  when  the  check  is 
deposited,  immediately  advising  the  debtor. 

In  case  the  check  is  not  enclosed  in  a  letter  which 


COLLECTIONS  287 

purports  to  contain  a  check,  the  creditor,  especially 
where  he  believes  the  omission  was  intentional,  could 
draw  on  the  debtor,  notifying  him  that  this  was  done 
as  the  most  convenient  way  of  remedying  the  error. 
In  any  event,  the  credit  man  should  be  exceedingly 
tactful  and  diplomatic  in  handling  these  problems,  for 
by  one  inappropriate  statement  or  move  a  valuable  cus- 
tomer may  be  lost. 


CHAPTER  XV 
LEGAL  REMEDIES  OF  THE  CREDITOR 

UNPAID  seller's  LIEN 

When  merchandise  is  sold  without  any  agreement 
for  an  extension  of  credit  to  the  purchaser,  the  seller 
has  a  lien  for  the  purchase  price.  That  is  to  say,  the 
vendor  need  not  part  with  the  merchandise  until  the 
price  is  paid  him.  And  this  is  true  even  though  title 
or  ownership  in  the  goods  has  already  passed  to  the 
vendee.  Moreover,  the  seller  has  a  lien  even  where 
the  merchandise  has  been  sold  on  credit,  if  the  buyer 
becomes  apparently  insolvent  and  the  goods  sold  or 
part  of  them  are  still  in  the  custody  of  the  vendor. 
This  rests  on  the  theory  that  though  the  vendor,  by 
giving  credit,  waives  his  lien  for  the  price,  he  does  so 
on  the  implied  condition  that  the  purchaser  keep  his 
credit  good. 

The  Uniform  Sales  Act,  which  has  been  enacted  in 
many  of  the  United  States,  sets  forth  the  general  prin- 
ciples governing  the  unpaid  seller's  lien  in  very  clear 
and  instructive  language.  Sections  54  to  56  of  the  act 
provide : 

WHEN  RIGHT  MAY  BE  EXERCISED 

( I )  Subject  to  the  provisions  of  this  act,  the  unpaid 
seller  of  goods  who  is  in  possession  of  them  is  entitled 

288 


LEGAL  REMEDIES  OF  THE  CREDITOR    289 

to  retain  possession  of  them  until  payment  or  tender 
of  the  price  in  the  following  cases,  namely: 

(a)  Where  the  goods  have  been  sold  without  any 
stipulation  as  to  credit ; 

(b)  Where  the  goods  have  been  sold  on  credit,  but 
the  term  of  credit  has  expired  ; 

(c)  Where  the  buyer  becomes  insolvent. 

(2)  The  seller  may  exercise  his  right  of  lien  not- 
withstanding that  he  is  in  possession  of  the  goods  as 
agent  or  bailee  for  the  buyer. 

LIEN  AFTER  PART  DELIVERY 

Where  an  unpaid  seller  has  made  part  delivery  of 
the  goods,  he  may  exercise  his  right  of  lien  on  the  re- 
mainder, unless  such  part  delivery  has  been  made  un- 
der such  circumstances  as  to  show  an  intent  to  waive 
the  lien  or  right  of  retention, 

WHEN  LIEN  IS  LOST 

(i)  The  unpaid  seller  of  goods  loses  his  lien 
thereon, — 

(a)  When  he  delivers  the  goods  to  a  carrier  or 
other  bailee  for  the  purpose  of  transmission  to  the 
buyer  without  reserving  the  property  in  the  goods  or 
the  right  to  the  possession  thereof; 

(b)  When  the  buyer  or  his  agent  lawfully  obtains 
possession  of  the  goods; 

(c)  By  waiver  thereof. 

(2)   The   unpaid   seller   of   goods,    having   a   lien 


290         CREDITS  AND  COLLECTIONS 

thereon,  does  not  lose  his  lien  by  reason  only  that  he 
has  obtained  judgment  or  decree  for  the  price  of  the 
goods. 

STOPPAGE   IN    TRANSITU 

It  sometimes  happens  that  a  seller,  who  has  sent 
goods  to  a  buyer  at  a  distance,  after  sending  them  finds 
that  the  buyer  is  insolvent.  Under  such  circumstances 
the  seller  may  stop  the  goods  at  any  time  before  they 
reach  the  buyer.  His  right  to  do  this  is  called  the  right 
of  stoppage  in  transitu:'^ 

It  is  important  to  note  that  this  right  exists  while 
the  goods  are  in  the  hands  of  a  carrier  or  middleman 
on  their  way  to  the  buyer,  and  continues  not  only  while 
the  goods  are  in  actual  transit,  but  until  they  have 
reached  their  destination  and  are  delivered  into  the 
actual  or  constructive  possession  of  the  consignee. 
The  mere  unloading  of  the  goods  and  placing  them  in 
the  warehouse  of  the  transportation  agency  does  not 
necessarily  end  the  period  of  transit  or  terminate  the 
vendor's  right  of  stoppage  in  transitu.    This  right  con- 

^  The  Uniform  Sales  Act,  which  has  been  enacted  in  many 
states,  provides :  Seller  may  stop  goods  on  buyer's  insolvency, 
— Subject  to  the  provisions  of  this  act,  when  the  buyer  of 
goods  is  or  becomes  insolvent,  the  unpaid  seller  who  has 
parted  with  the  possession  of  the  goods  has  the  right  of  stop- 
ping them  in  transitu,  that  is  to  say,  he  may  resume  posses- 
sion of  the  goods  at  any  time  while  they  are  in  transit,  and 
he  will  then  become  entitled  to  the  same  rights  in  regard  to 
the  goods  as  he  would  have  had  if  he  had  never  parted  with 
the  possession. 


LEGAL  REMEDIES  OF  THE  CREDITOR    291 

tinues  as  long  as  the  goods  remain  in  the  hands  of  the 
carrier  as  such.^ 

*  Section  58  of  the  Uniform  Sales  Act  provides:  (i)  Goods 
are  in  transit  within  the  meaning  of  section  57, 

(a)  From  the  time  when  they  are  delivered  to  a  carrier 
by  land  or  water,  or  other  bailee  for  the  purpose  of  trans- 
mission to  the  buyer,  until  the  buyer,  or  his  agent  in  that 
behalf,  takes  delivery  of  them  from  such  carrier  or  other 
bailee; 

(b)  If  the  goods  are  rejected  by  the  buyer,  and  the  car- 
rier or  other  bailee  continues  in  possession  of  them,  even  if 
the  seller  has  refused  to  receive  them  back. 

(2)  Goods  are  no  longer  in  transit  within  the  meaning  of 
section  57, 

(a)  If  the  buyer,  or  his  agent  in  that  behalf,  obtains  de- 
livery of  the  goods  before  their  arrival  at  the  appointed  des- 
tination ; 

(b)  If,  after  the  arrival  of  the  goods  at  the  appointed  des- 
tination, the  carrier  or  other  bailee  acknowledges  to  the  buyer 
or  his  agent  that  he  holds  the  goods  on  his  behalf  and  con- 
tinues in  possession  of  them  as  bailee  for  the  buyer  or  his 
agent ;  and  it  is  immaterial  that  a  further  destination  for  the 
goods  may  have  been  indicated  by  the  buyer. 

(c)  If  the  carrier  or  other  bailee  wrongfully  refuses  to 
deliver  the  goods  to  the  buyer  or  his  agent  in  that  behalf. 

(3)  If  goods  are  delivered  to  a  ship  chartered  by  the  buyer, 
it  is  a  question  depending  on  the  circumstances  of  the  par- 
ticular case,  whether  they  are  in  the  possession  of  the  master 
as  a  carrier  or  as  agent  of  the  buyer. 

(4)  If  part  delivery  of  the  goods  has  been  made  to  the 
buyer,  or  his  agent  in  that  behalf,  the  remainder  of  the  goods 
may  be  stopped  in  transitu,  unless  such  part  delivery  has  been 
made  under  such  circumstances  as  to  show  an  agreement  with 
the  buyer  to  give  up  possession  of  the  whole  of  the  goods. 


292         CREDITS  AND  COLLECTIONS 

This  right  of  stoppage  exists  only  when  the  pur- 
chaser apparently  becomes  insolvent  after  the  sale  or 
was  insolvent  when  the  sale  was  made,  although  that 
fact  was  not  discovered  by  the  vendor  until  later. 
Actual  or  technical  insolvency  of  the  purchaser  is  not 
an  absolute  requisite.  It  will  suffice  if  the  purchaser 
by  his  manner  of  conducting  his  business  and  meeting 
his  obligations  furnishes  the  ordinary  apparent  evi- 
dences of  insolvency.  Thus,  the  right  exists  where 
the  purchaser  has  not  been  able  to  meet  his  bills  at 
maturity,  or  where  his  notes  have  gone  to  protest  be- 
cause of  his  inability  to  pay  them  in  the  regular  course 
of  business.  If,  however,  the  seller  stops  the  goods 
when  there  are  no  evidences  of  the  buyer's  insolvency, 
he  will  be  compelled  to  deliver  the  goods  and,  in  addi- 
tion, he  will  be  answerable  for  any  damages  caused 
to  the  buyer  by  the  delay. 

When  the  seller  desires  to  exercise  the  right  of  stop- 
page in  transitu  he  should  notify  the  transportation 
company  or  its  agents  to  hold  the  goods.  No  special 
form  of  notice  is  necessary.  The  usual  method  is  to 
notify  the  carrier  of  the  seller's  claim  and  require  the 
carrier  to  hold  the  goods,  forbidding  their  delivery  to 
the  purchaser.  Section  59  of  the  Uniform  Sales  Act 
provides : 

Ways  of  exercising  the  right  to  stop. — (i)  The  un- 
paid seller  may  exercise  his  right  of  stoppage  in 
transitu  either  by  obtaining  actual  possession  of  the 
goods  or  by  giving  notice  of  his  claim  to  the  carrier 
or  other  bailee  in  whose  possession  the  goods  are.  Such 
notice  may  be  given  either  to  the  ^^erson  in  actual  pos- 
session of  the  goods  or  to  his  principal.     In  the  latter 


LEGAL  REMEDIES  OF  THE  CREDITOR    293 

case  the  notice,  to  be  effectual,  must  be  given  at  such 
time  and  under  such  circumstances  that  the  principal, 
by  the  exercise  of  reasonable  diligence,  may  prevent  a 
delivery  to  the  buyer. 

(2)  When  notice  of  stoppage  in  transitu  is  given  by 
the  seller  to  the  carrier,  or  other  bailee  in  possession 
of  the  goods,  he  must  redeliver  the  goods  to,  or  ac- 
cording to  the  directions  of,  the  seller.  The  expenses 
of  such  delivery  must  be  borne  by  the  seller.  If,  how- 
ever, a  negotiable  document  of  title  representing  the 
goods  has  been  issued  by  the  carrier  or  other  bailee,  he 
shall  not  be  obliged  to  deliver  or  justified  in  delivering 
the  goods  to  the  seller  unless  such  document  is  first 
surrendered  for  cancellation. 

Section  62  provides : 

Effect  of  sale  of  goods  subject  to  lien  or  stoppage 
in  transitu. — Subject  to  the  provisions  of  this  act,  the 
unpaid  seller's  right  of  lien  or  stoppage  in  transitu  is 
not  affected  by  any  sale,  or  other  disposition  of  the 
goods  v^fhich  the  buyer  may  have  made,  unless  the 
seller  has  assented  thereto. 

If,  however,  a  negotiable  document  of  title  has  been 
issued  for  goods,  no  seller's  lien  or  right  of  stoppage 
in  transitu  shall  defeat  the  right  of  any  purchaser  for 
value  in  good  faith  to  whom  such  document  has  been 
negotiated,  whether  such  negotiation  be  prior  or  sub- 
sequent to  the  notification  to  the  carrier,  or  other  bailee 
who  issued  such  document,  of  the  seller's  claim  to  a 
lien  or  right  of  stoppage  in  transitu. 

It  is  apparent  from  the  second  paragraph  of  the 
foregoing  section  that  the  right  of  stoppage  will  be 
defeated  if  the  bill  of  lading  is  in  negotiable  form  and 


294         CREDITS  AND  COLLECTIONS 

has  been  transferred  by  the  purchaser  to  a  bona-fide 
purchaser  for  value.  This  is  based  on  the  theory  that 
it  is  better  to  Hmit  the  right  of  stoppage  in  transitu 
of  a  seller  who  has  intrusted  the  buyer  with  a  perfect 
apparent  title,  than  to  deprive  the  innocent  purchaser 
of  the  goods.  However,  a  resale  of  the  goods  by  the 
vendee  without  a  transfer  of  a  negotiable  document  of 
title  will  in  no  way  affect  the  vendor's  right  of  stop- 
page. 

RESULT  OF  STOPPAGE  IN  TRANSITU 

The  fact  that  the  seller  has  exercised  the  right  of 
stoppage  in  transitu  does  not  necessarily  result  in  a 
rescission  of  the  original  contract  of  sale,  unless  the 
two  parties  have  so  decided  either  by  word  or  action. 
For  the  purchaser's  non-performance  of  the  contract, 
then,  the  seller  has  a  right  to  sue  for  damages  repre- 
senting the  loss  sustained  through  the  buyer's  non- 
performance or  by  a  fall  in  the  market  price  of  the 
goods.  And,  in  view  of  the  fact  that  stoppage  in 
transitu  does  not  rescind  the  contract  of  sale,  the  pur- 
chaser may  obtain  the  goods  on  paying  the  price ;  or, 
in  case  the  purchaser  is  willing  and  able  to  carry  out 
his  part  of  the  contract,  he  can  sue  the  seller  for  dam- 
ages for  failure  of  the  seller  to  deliver  the  goods  ac- 
cording to  the  contract  terms. 

RESALE  BY  THE  SELLER 

Under  certain  circumstances  the  seller  may  resell  the 
goods  stopped  in  transit.     Section  60  of  the  Uniform 


LEGAL  REMEDIES  OF  THE  CREDITOR    295 

Sales  Act,  which  prescribes  the  time  and  manner  of  re- 
sale, says : 

When  and  how  resale  may  he  made. —  (i)  Where 
the  goods  are  of  a  perishable  nature,  or  where  the 
seller  expressly  reserv^es  the  right  of  resale  in  case  the 
buyer  should  make  default,  or  where  the  buyer  ha? 
been  in  default  in  the  payment  of  the  price  an  un- 
reasonable time,  an  unpaid  seller  having  a  right  of 
lien  or  having  stopped  the  goods  in  transitu  may  resell 
the  goods.  He  shall  not  thereafter  be  liable  to  the 
original  buyer  upon  the  contract  to  sell  or  the  sale  or 
for  any  profit  made  by  such  resale,  but  may  recover 
from  the  buyer  damages  for  any  loss  occasioned  by  the 
breach  of  the  contract  or  the  sale. 

(2)  Where  a  resale  is  made,  as  authorized  in  this 
section,  the  buyer  acquires  a  good  title  as  against  the 
original  buyer. 

(3)  It  is  not  essential  to  the  validity  of  a  resale  that 
notice  of  an  intention  to  resell  the  goods  be  given  by 
the  seller  to  the  original  buyer.  But  where  the  right 
to  resell  is  not  based  on  the  perishable  nature  of  the 
goods  or  upon  an  express  provision  of  the  contract 
or  the  sale,  the  giving  or  failure  to  give  such  notice 
shall  be  relevant  in  any  issue  involving  the  question 
whether  the  buyer  had  been  in  default  an  unreasonable 
time  before  the  resale  was  made. 

(4)  It  is  not  essential  to  the  validity  of  a  resale  that 
notice  of  the  time  and  place  of  such  resale  should  be 
given  by  the  seller  to  the  original  buyer. 

(5)  The  seller  is  bound  to  exercise  reasonable  care 
and  judgment  In  making  a  resale,  and  subject  to  this 
requirement  may  make  a  resale  either  by  public  or  pri- 
vate sale. 


296         CREDITS  AND  COLLECTIONS 

RESCISSION  BY  THE  SELLER 

Regarding  the  time  and  manner  in  which  the  seller 
may  rescind  the  original  sale,  Section  61  of  the  Act 
states  that : 

(i)  An  unpaid  seller  having  a  right  of  lien  or  hav- 
ing stopped  the  goods  in  transitu,  may  rescind  the 
transfer  of  title  and  resume  the  property  in  the  goods, 
where  he  expressly  reserved  the  right  to  do  so  in  case 
the  buyer  should  make  default,  or  where  the  buyer 
has  been  in  default  in  the  payment  of  the  price  an 
unreasonable  time.  The  seller  shall  not  thereafter  be 
liable  to  the  buyer  upon  the  contract  to  sell  or  the  sale, 
but  may  recover  from  the  buyer  damages  for  any  loss 
occasioned  by  the  breach  of  the  contract  or  the  sale. 

(2)  The  transfer  of  title  shall  not  be  held  to  have 
been  rescinded  by  an  unpaid  seller  until  he  has  mani- 
fested by  notice  to  the  buyer  or  by  some  other  overt 
act  an  intention  to  rescind.  It  is  not  necessary  that 
such  overt  act  should  be  communicated  to  the  buyer, 
but  the  giving  or  failure  to  give  notice  to  the  buyer 
of  the  intention  to  rescind  shall  be  relevant  in  any  issue 
involving  the  question  whether  the  buyer  had  been  in 
default  an  unreasonable  time  before  the  right  of 
rescission  was  asserted. 


RECOVERY  OF  THE  GOODS 

Under  certain  circumstances,  even  where  the  vendor 
has  lost  his  right  of  stoppage  in  transit,  he  may  recover 
the  goods  from  the  possession  of  the  purchaser.  This 
is  true,  for  example,  where  the  purchaser  has  been 
guilty  of  fraud  or  misrepresentation  in  inducing  the 


LEGAL  REMEDIES  OF  THE  CREDITOR    297 

seller  to  make  the  sale.  The  misrepresentation  must 
have  been  made  before  the  sale  and  must  have  been 
relied  upon  by  the  seller  in  transferring  the  title  to  the 
goods.  Fraud  subsequent  to  the  actual  transfer  of  the 
goods  will  not  give  the  seller  a  right  to  recover  the 
goods.  Nor  will  the  mere  fact  that  the  buyer  was 
insolvent  at  the  time  of  the  sale  give  the  seller  the 
right  to  reclaim  the  goods,  unless  the  purchaser  misrep- 
resented his  financial  condition,  or,  unless  at  the  time 
of  the  purchase,  he  did  not  intend  to  pay.  And  it  has 
been  held  by  the  courts  of  some  states  that  the  fact  that 
the  buyer  has  no  reasonable  expectation  of  being  able 
to  pay  is  the  equivalent  of  an  intention  not  to  pay. 

When  the  seller  has  the  right  to  recover  the  goods, 
he  may  follow  them  and  reclaim  them,  although  their 
form  has  been  changed.  However,  if  the  goods  have 
been  so  intermingled  with  other  goods  of  the  same 
character  that  they  cannot  be  identified,  the  right  to 
reclaim  them  is  practically  lost.  The  seller  may  like- 
wise follow  any  proceeds  of  the  goods  received  by  the 
purchaser  so  long  as  the  proceeds  can  be  identified,  but 
the  right  is  lost  as  soon  as  their  identity  becomes  indis- 
tinguishable. But  if  the  goods  or  the  proceeds  get  into 
the  hands  of  an  innocent  third  person,  who  acquired 
title  by  paying  value  and  without  knowledge  of  the 
original  purchaser's  fraud,  the  original  vendor  loses 
all  right  to  recover  the  specific  articles. 

A  sale,  however,  is  to  be  distinguished  from  a  mere 
delivery  of  possession  induced  by  fraud;  for,  in  the 
latter  case,  the  person  obtaining  possession  acquires  no 
ownership  in  the  goods  and  can  pass  none  to  a  third 


298         CREDITS  AND  COLLECTIONS 

person,  no  matter  what  value  the  third  person  paid, 
nor  how  Innocent  he  may  be.  Thus,  a  person  may 
obtain  possession  of  goods  by  fraudulently  imperson- 
ating another  or  fraudulently  pretending  to  be  the 
agent  of  another,  to  whom  the  owner  of  the  goods 
imagines  he  is  selling  on  credit.  In  this  case  the  owner 
of  the  goods  never  intends  to  pass  title,  nor  does  he 
consent  to  sell  to  the  person  to  whom  the  goods  were 
delivered.  Hence  the  person  who  obtains  the  goods 
acquired  no  title,  and  any  one  who  purchases  from  him 
acquires  no  better  title.  In  this  case,  then,  the  original 
owner  of  the  goods  may  obtain  them  from  any  one 
who  has  possession  of  them. 

WAIVER   OF   RIGHT   TO   RECOVER 

A  seller  may,  by  his  act  or  word,  waive  the  right  to 
recover  the  goods,  ^^^here,  for  example,  the  seller  has 
full  knowledge  of  the  fraud  committed  by  the  pur- 
chaser, and  then  accepts  payment  or  a  note  or  security, 
the  right  of  recovering  the  goods  Is  lost.  A  mere  de- 
mand for  payment,  however,  does  not  amount  to  a 
waiver  of  the  right  to  recover.  But,  if  the  seller  brings 
a  suit  for  the  price  of  the  goods,  knowing  all  of  the 
facts,  he  Is  estopped  from  reclaiming  the  goods,  for  his 
action  amounts  to  an  affirmance  of  the  contract  of  sale. 
However,  if  any  of  these  actions  are  taken  by  the  seller 
before  he  knows  anything  about  the  fraud  he  would 
not  be  estopped  from  recovering  the  goods. 

The  bankruptcy  of  the  purchaser  does  not  affect  the 
seller's  remedy  of  recovery  of  the  goods  themselves. 


LEGAL  REMEDIES  OF  THE  CREDITOR     299 

ATTACHMENT 

Another  remedy  available  for  the  protection  of  cred- 
itors is  that  of  attachment.  The  writ  of  attachment 
enables  a  creditor  to  have  property  of  the  debtor  seized 
and  held  for  the  payment  of  a  debt  on  which  suit  has 
been  or  is  about  to  be  brought  by  a  creditor.  This 
right  of  attachment  is  a  purely  statutory  one  and  is 
available  only  on  those  grounds  specifically  enumerated 
by  the  statutes  of  the  various  states.  The  statutes  dif- 
fer widely,  but  in  general  they  provide  that  a  creditor 
may  attach  the  property  of  a  debtor  on  one  of  the 
following  grounds : 

1.  That  the  debtor  is  a  non-resident  of  the  state 
where  the  writ  of  attachment  is  sought  against  the 
debtor's  property  located  within  the  state. 

2.  That  the  debtor  has  departed  from  the  state  with 
intent  to  defraud  creditors  or  to  avoid  service  of  legal 
process. 

3.  That  the  debtor  with  like  intent  keeps  himself 
concealed  within  the  state. 

4.  That  the  debtor  has  removed  property  or  is  about 
to  dispose  of  property  for  the  purpose  of  defrauding 
his  creditors. 

5.  That  the  debtor  has  secured  property  from  the 
creditor  by  fraudulent  representations,  such  as  the 
making  of  a  false  statement  in  writing  regarding  his 
financial  position. 

These  grounds  for  obtaining  an  attachment  against 
the  property  of  the  debtor  are  not  common  to  all  states, 
while  in  some  states  there  are  additional  grounds  for 
using  this  remedy.    A  careful  study  of  the  statutes  of 


300         CREDITS  AND  COLLECTIONS 

the  state,  wherein  the  remedy  is  sought,  is  necessary  in 
each  case. 

ADVANTAGES  OF  ATTACHMENT 

In  practically  all  states,  the  statutes  authorizing 
attachments  require,  as  a  condition  precedent  to  the 
issuance  of  the  writ  of  attachment,  that  a  bond  shall 
be  given  by  the  creditor  to  cover  the  costs  of  the  pro- 
ceedings and  to  protect  the  debtor  from  any  injury 
which  would  result  from  a  wrongful  attachment. 

The  important  advantage  of  issuing  an  attachment 
is  apparent  to  those  creditors  who  have  had  the  experi- 
ence of  suing  a  debtor,  who  apparently  had  assets  at 
the  time  the  suit  was  begun,  but  whose  assets  have  dis- 
appeared and  are  untraceable  after  judgment  is  ob- 
tained. Where  attachment  is  available,  the  creditor 
may  have  the  property  of  the  debtor  seized  before  suit 
is  brought,  and  held  after  judgment  is  obtained,  when 
the  attached  property  may  be  sold  and  the  judgment 
satisfied. 

SUPPLEMENTARY    PROCEEDINGS 

It  is  true,  however,  that  where  the  debtor  transfers 
his  property  after  suit  is  brought,  even  where  attach- 
ment is  not  resorted  to,  the  creditor  may,  after  obtain- 
ing judgment,  examine  the  debtor  in  supplementary 
proceedings  to  discover  what  disposition  the  debtor  has 
made  of  the  property.  Of  course,  if  during  the  ex- 
amination in  supplementary  proceedings,  the  creditor 
discovers  the  debtor  has  fraudulently  transferred  the 
property,  for  example,  to  his  wife  without  receiving 
any    valuable    consideration    therefor,    the    judgment 


LEGAL  REMEDIES  OF  THE  CREDITOR     301 

creditor  may  have  the  transfer  set  aside.  The  prop- 
erty would  then  become  available  for  the  satisfaction 
of  the  creditor's  claim. 


GARNISHMENT 

Where  propert}'-  has  been  transferred  for  the  pur- 
pose of  defrauding  creditors,  the  creditor  may,  in  many 
jurisdictions,  hold  the  transferee  liable  as  trustee  to 
account  for  the  property  or  its  proceeds.  This  right 
is  known  as  the  right  of  garnishment.  It  applies  not 
only  to  the  case  described,  but  also  to  any  case  where  a 
third  party  has  in  his  hands  any  funds  or  property  be- 
longing to  the  debtor.  Like  the  right  of  attachment, 
garnishment  is  essentially  a  statutory  remedy,  and  its 
scope  and  application  is  limited  by  the  statutes  of  each 
state. 

BULK  SALES  LAW 

Debtors  have  frequently,  in  an  attempt  to  defraud 
their  creditors,  resorted  to  the  scheme  of  selling  their 
entire  stock  in  bulk  at  a  price  considerably  below  the 
actual  value  of  the  stock.  The  sale  might  be  made 
either  to  a  confederate  wrongdoer  or  to  one  who  p>er- 
mitted  his  morals  to  become  blunted  by  the  monetary 
gain  possible  from  the  low-priced  purchase.  The 
debtor,  having  disposed  of  the  stock,  would  then  find 
it  an  easy  matter  to  dissipate  or  conceal  the  proceeds 
of  the  sale  and  successfully  make  a  fraudulent  failure; 
or  after  completing  the  sale,  he  might  be  inclined  to 
remove  to  other  parts  without  notifying  his  creditors. 

To  place  difficulties  in  the  way  of  such  debtors,  if 


302         CREDITS  AND  COLLECTIONS 

not  to  eliminate  entirely  their  contemptible  practices, 
the  various  state  legislatures,  usually  at  the  instance 
of  the  National  and  local  associations  of  credit  men, 
have  passed  so-called  bulk  sales  laws.  The  object  of 
these  laws  is  to  prevent  a  repetition  of  the  injurious 
and  dishonorable  practises  described  above,  usually  by 
compelling  the  purchaser  of  the  bulk  stock  to  obtain  a 
list  of  the  seller's  creditors  and  to  notify  them  of  the 
sale  at  least  five  days  before  the  completion  of  the 
sale.  While  these  laws  differ  in  a  number  of  the  states, 
the  penalty  prescribed  for  failure  of  the  bulk  goods 
purchaser  to  notify  the  creditors  is  in  most  instances  to 
make  the  sale  either  absolutely  void  or  presumptively 
fraudulent  on  creditors. 

In  general,  the  states  having  laws  regulating  the 
sale  of  goods  in  bulk  may  be  divided  into  five  groups. 
The  first  of  these,  consisting  of  four  states,  requires 
notice  of  the  proposed  sale  to  be  publicly  recorded 
from  five  to  ten  days  before  the  sale  is  completed. 
Creditors  who  are  subscribers  to  the  large  mercantile 
agencies  would  receive  notice  from  the  agency  of  such 
recording  and  thus  be  stirred  to  further  action. 

The  second  group,  of  fourteen  states,  require  that 
the  purchaser  demand  and  receive  of  the  seller  a  list 
of  the  names  and  addresses  of  his  creditors  and 
amount  due  each ;  the  purchaser  is  also  required  to 
notify  each  creditor  of  the  terms  and  conditions  of  the 
sale,  either  personally  or  by  registered  mail,  from  five 
to  ten  days  before  the  sale  is  completed. 

The  third  group,  of  eighteen  states,  have  the  same 
requirements  as  the  second  group  and  in  addition  re- 
quire an  inventory  to  be  taken  and  notice  to  be  given 


LEGAL  REMEDIES  OF  THE  CREDITOR    303 

in  person  or  by  registered  mail,  as  in  the  second  group. 

The  fourth  group  of  states,  four  in  number,  re- 
quire the  purchaser  to  demand  a  sworn  statement  con- 
taining a  Hst  of  the  debtors  and  creditors  and  provide 
that  all  sales  in  bulk  shall  be  void  unless  the  purchaser 
shall  pay  or  see  to  it  that  the  purchase  money  of  such 
property  is  applied  to  the  payment  of  all  bona  fide  debts 
of  the  vendor,  share  and  share  alike. 

Louisiana  statutes  make  it  a  misdemeanor  to  pur- 
chase goods  on  credit  and  to  sell  or  otherwise  dispose 
of  them  out  of  the  usual  course  of  business,  with  intent 
to  defraud,  and  also  for  a  purchaser  to  purchase  a 
stock  of  goods  in  bulk  without  first  obtaining  a  sworn 
statement  from  the  vendor  that  they  are  paid  for. 

THE  USE  OF  THE  BULK  SALES  LAW 

As  a  general  principle  in  regard  to  the  Bulk  Sales 
Law,  it  may  be  said  that  its  chief  practical  advantage 
is  that  it  puts  the  burden  of  proof  upon  the  defendant 
in  cases  where  a  creditor  seeks  to  set  aside  sales  of 
goods  as  fraudulent.  The  creditor  is  obliged  merely 
to  show  that  the  sale  took  place  without  conforming  to 
the  requirements  of  the  Bulk  Goods  Law.  That  auto- 
matically creates  the  presumption  pursuant  to  the  stat- 
ute that  the  sale  was  fraudulent  and  shifts  the  burden 
of  proof  to  the  defendant,  who  is  then  obliged  to  prove 
that  the  sale  was  bona  fide. 

In  some  states,  where  the  sale  is  by  statute  made 
absolutely  void  for  non-conformity,  it  may  be  held  that 
the  presumption  thus  raised  is  not  rebuttable  by  the 
purchaser  in  bulk,  in  which  case  the  sale  is  set  aside 


304         CREDITS  AND  COLLECTIONS 

by  decree  of  court,  and  the  property  then  becomes  sub- 
ject to  levy  under  execution  against  the  seller. 

Most,  if  not  all.  States  have  a  law  permitting  the  set- 
ting aside  of  sales  where  the  sale  was  without  consid- 
eration or  for  the  purpose  of  preventing  creditors  of 
the  seller  from  levying.  This  law  is  one  very  difficult 
to  use  successfully  on  account  of  the  frequent  impossi- 
bility of  producing  evidence  to  show  that  the  sale  was 
without  consideration  or  was  otherwise  fraudulent,  as 
all  of  such  evidence  is  in  the  possession  of  the  parties 
to  the  sale,  who  are  obviously  secretive.  The  Bulk 
Law  enables  creditors  to  make  use  of  such  statutes  by 
throwing  the  burden  on  the  purchaser  of  proving  that 
the  sale  under  which  he  took  the  goods  was  free  from 
taint. 

Practically,  the  use  of  the  Bulk  Law  varies  In  vari- 
ous states  according  to  the  character  of  the  statutes 
in  those  states  pertaining  to  attachments,  garnishee 
process  and  other  remedies  provided.  A  typical  case 
would  be  for  the  commencement  of  an  action  by  the 
creditor  against  the  debtor  and  the  purchaser  of  goods 
in  bulk,  in  which  case  an  attachment  or  garnishee 
process  would  be  issued,  setting  up  fraud  in  that  the 
terms  of  the  Bulk  Law  were  not  complied  with. 
Armed  with  this  process,  the  sheriff  or  other  appro- 
priate officer  seizes  the  goods  thus  sold  in  bulk  from 
the  possession  of  the  purchaser  and  holds  them  to 
await  the  outcome  of  the  trial  of  the  action.  In  that 
action  the  creditor  merely  shows  that  the  debtor  sold 
his  stock  without  complying  with  the  Act.  This  cre- 
ates a  prima  facie  case  in  support  of  the  creditor's  con- 
tention that  the  sale  was  fraudulent.     If  the  debtor 


LEGAL  REMEDIES  OF  THE  CREDITOR     305 

or  the  purchaser  of  the  goods  in  bulk  is  unable  to  show 
that  he  gave  full  value  for  the  property  and  had  no 
reason  to  suppose  that  the  property  was  being  disposed 
of  for  the  purpose  of  defrauding  creditors,  the  plain- 
tiff would  win  his  action,  and  the  sheriff  would  turn 
over  the  goods  or  the  proceeds  of  their  sale  at  auction 
to  him  under  the  execution  issued  upon  the  judgment. 
If,  on  the  other  hand,  the  purchaser  of  the  goods  in 
bulk  succeeded  in  showing  that  the  purchase  was  made 
by  him  for  approximately  fair  value,  without  fraud  of 
any  kind,  the  attachment  would  be  vacated  and  the 
creditor  would  lose  his  case,  except  in  those  states 
where  sales  in  bulk  are  declared  absolutely  void  for 
non-conformity  with  the  statute.-^ 

In  the  latter  case,  assuming  that  the  proper  notice 
has  been  given  by  the  vendee  under  the  Bulk  Sales 
Statute  and  the  money  paid  over  but  possession  of  the 
merchandise  not  taken  at  the  end  of  the  fifth  day,  the 
creditors  may  attach  the  merchandise,  stock  or  fix- 
tures or  use  any  other  legal  process  competent  to  get 
the  assets  for  the  payment  of  their  claims.  If  pos- 
session of  the  stock  has  been  taken  in  less  than  five 
days,  and  the  notice  was  duly  given  by  the  vendee  un- 
der the  Bulk  Sales  Law,  and  the  money  was  held  until 
the  end  of  the  five  days,  then  the  creditor  may  subject 
the  money  in  the  hands  of  the  vendee  for  the  payment 
of  his  claim.  ^ 

On  the  other  hand.  If  the  act  has  not  been  complied 
with  by  the  vendee  or  the  vendor  in  transferring  goods, 

^  From  A  Brief — Hints  on  Using  the  Bulk  Sales  Laiv, 
National  Association  of  Credit  Men. 

2  From  National  Association  of  Credit  Men's  circular. 


3o6         CREDITS  AND  COLLECTIONS 

wares,  merchandise  and  fixtures,  the  creditor's  remedy 
is  by  way  of  application  to  the  court  asking  for  the 
appointment  of  a  receiver  to  take  charge  of  and  hold 
the  property  which  has  been  transferred,  or  setting 
forth  the  facts  and  praying  that  the  purchaser  be  de- 
clared a  trustee  for  the  benefit  of  the  creditors  of  the 
seller,  that  the  debts  be  determined  and  an  appraise- 
ment of  the  property  made,  the  property  sold  and  the 
proceeds  accounted  for  and  distributed  to  the  creditors 
of  the  original  seller.  The  petition  to  the  court  must 
be  made  within  ninety  days  subsequent  to  the  transfer 
of  the  goods,  wares,  merchandise  or  fixtures. 

Upon  the  filing  of  the  application,  after  showing 
that  the  act  has  been  violated,  the  court  without  fur- 
ther proof  should  declare  the  purchaser  a  trustee  or 
appoint  a  receiver  to  take  charge  of  all  of  the  property 
transferred,  and  administer  it  for  the  benefit  of  the 
creditors  of  the  vendor. 


CHAPTER  XVI 

EXTENSIONS,   COMPOSITIONS   AND 
ADJUSTMENTS 

Sometimes  a  debtor  finds  that  he  has  a  large  equity 
in  his  business,  that  is,  an  actual  surplus  of  assets  over 
liabilities,  but  that  he  cannot  continue  to  meet  his  obli- 
gations as  they  mature.  This  condition  is  usually  due 
to  an  insufficiency  of  working  capital,  caused  by  over- 
stocking, a  policy  of  too  liberal  credit  granting,  care- 
lessness in  making  prompt  collections  of  outstanding 
accounts,  or  even  the  impossibility  of  making  collec- 
tions on  account  of  a  general  or  local  business  de- 
pression. 

MOTIVES  PROMPTING  AN  EXTENSION 

When  a  debtor  is  thus  situated  his  wisest  course  is 
to  consult  with  his  largest  creditors  and  seek  an  exten- 
sion of  time  in  which  to  meet  his  obligations.  From 
purely  selfish  motives  every  credit  man  should  give 
serious  consideration  to  such  a  request,  this  for  the 
reason  that  the  action  of  certain  credit  men  in  refusing 
to  give  careful  heed  to  a  debtor's  petition,  and  in  vig- 
orously insisting  upon  immediate  and  full  payment, 
has  resulted  very  frequently  in  the  failure  and  bank- 
ruptcy of  the  debtor  with  the  ensuing  large  and  proba- 
bly unnecessary  losses  to  both  debtor  and  creditors. 

307 


3o8         CREDITS  AND  COLLECTIONS 

Under  the  same  circumstances  forbearance  and 
watchfulness  on  the  part  of  the  creditors,  even  to  the 
extent  of  actively  supervising  the  business  of  the 
debtor,  might  have  brought  about  an  entirely  different 
outcome — probably  the  eventual  payment  of  all  debts 
in  full  and  the  continuation  of  profitable  business  rela- 
tions with  the  debtor. 


THE  HUMANITARIAN  SIDE 

Then,  too,  humanitarian  motives  should  prompt  the 
credit  man  to  act  with  the  utmost  care,  even  hesitancy, 
before  resorting  to  any  drastic  action  which  would 
bring  about  the  bankruptcy  of  an  honest  debtor.  Let 
every  credit  man  realize  that  business  losses  are  prac- 
tically inevitable  and  that  the  most  scrupulous  and 
conscientious  of  debtors  may  face  reversals  due  to 
causes  beyond  their  control.  These  debtors,  at  least, 
are  entitled  to  the  moral  support  and  active  assistance 
of  their  creditors,  who,  over  a  series  of  years,  have 
made  profits  out  of  their  business  relations  with  the 
now  unfortunate  debtor.  The  credit  man  must  make 
no  mistake  in  dealing  with  such  an  embarrassed  debtor. 
A  false  step  by  the  creditor  may  precipitate  the  debtor's 
bankruptcy,  resulting  in  irreparable  injury  not  only  to 
the  debtor  himself,  but  also  to  the  debtor's  family  and 
dependents.  When,  therefore,  a  debtor  asks  for  an 
extension  or  seeks  a  composition,  it  is  incumbent  on 
every  creditor  to  make  searching  inquiry  before  re- 
fusing the  debtor's  request. 


EXTENSIONS,  COMPOSITIONS,  ETC.     309 

WHEN  TO  GRANT  AN  EXTENSION 

Among-  the  important  questions  for  the  credit  man 
to  answer  when  a  debtor  seeks  an  extension  are  the 
following- : 

First.  Is  the  debtor  honest?  Here  character  is  all 
important.  If  the  creditor  is  dishonest  he  is  not  en- 
titled to  consideration  by  his  creditors.  If  he  lacks 
that  necessary  quality  of  character  his  integrity  cannot 
be  relied  upon  to  protect  the  interests  of  his  creditors 
and  an  extension  of  time  would  simply  give  the  dis- 
honest debtor  an  additional  opportunity  to  perpetrate 
a  fraud  upon  his  unsuspecting  creditors. 

Second.  Has  the  debtor  sufficient  strength  to  con- 
tinue in  business  and  extricate  himself  from  his  pres- 
ent difficulties?  In  other  words,  will  the  assistance 
given  him  enable  him  to  continue  successfully?  Here 
the  capacity  of  the  debtor  is  the  determining  factor. 

When  a  debtor  asks  for  an  extension,  he  exposes  his 
condition  and  impairs  his  credit  in  all  markets.  This 
effectually  shuts  off  the  debtor's  credit  in  new  markets 
and  imposes  upon  those  creditors  granting  the  exten- 
sion the  obligation  of  continuing  to  sell  the  debtor. 
This  is  in  most  cases  practically  mandatory,  for  the 
debtor  must  have  new  and  fresh  merchandise  to  replen- 
ish his  stock  to  meet  the  demands  of  his  own  custom- 
ers. Inasmuch  as  the  debtor  finds  it  impossible  to  ob- 
tain any  new  credits,  he  must  obtain  the  merchandise 
from  his  old  creditors,  and  their  failure  to  supply  the 
merchandise  diminishes  their  chances  of  eventually  be- 
ing paid  for  the  original  indebtedness. 

Whether  or  not  the  impairment  of  the  debtor's  credit 


3IO         CREDITS  AND  COLLECTIONS 

will  be  so  serious  as  to  make  it  impossible  for  him  to 
continue  and  successfully  extricate  himself  depends 
largely  on  his  condition  at  the  time  the  extension  is 
sought.  If  the  debtor  has  been  in  good  standing  and 
can  demonstrate  to  his  creditors  that  his  condition  is 
only  temporary,  they  will  in  all  probability  continue  to 
check  ^  him,  and  he  will  eventually  be  able  to  work  his 
way  out  of  his  difficulties. 

REASONS  FOR  EMBARRASSMENT 

A  third  matter  for  the  creditor  to  consider  is  the 
reasons  for  the  debtor's  embarrassment  and  the  pros- 
pects of  improvement  or  aggravation  of  the  debtor's 
condition. 

The  debtor  may  be  tied  up  with  a  large  stock  of 
merchandise,  most  of  which  is  saleable.  This  stock 
when  gradually  liquidated  may  provide  sufficient  cash 
to  pay  all  old  indebtedness.  Under  these  circumstances 
the  debtor  will  not  find  it  necessary  to  make  many  ad- 
ditional purchases  before  discharging  his  debts,  and 
he  can  obtain  such  additional  stock,  as  he  needs,  from 
his  old  creditors  or  for  cash  in  the  open  market. 

On  the  other  hand,  the  debtor  may  have  outstanding 
accounts  receivable  which  are  good  and  collectible  but 
slow-paying.  The  slow-paying  condition  of  the  ac- 
counts may  be  the  result  of  outside  conditions  or  of  the 
collection  methods  of  the  house.  In  the  former  case 
time  itself  will  usually  remedy  the  conditions,  while  in 

^  A  technical  expression  which  means  the  creditor  approves 
the  debtor's  request  for  credit. 


EXTENSIONS,  COMPOSITIONS,  ETC.      311 

the  latter  case  the  collection  methods  may  easily  be 
rectified. 


THE  SITUATION  IN  THE  SOUTH  IN   I914 

Illustrative  of  outside  conditions  affecting  debtors 
is  the  situation  which  existed  in  the  South  in  the  fall 
of  1914,  immediately  following  the  outbreak  of  the 
Great  European  War.  At  that  time  the  price  of  cot- 
ton was  so  low,  and  so  impoverished  was  the  South 
generally,  that  many  Southern  consumers  found  them- 
selves unable  to  pay  the  retailers  from  whom  they 
bought  goods  on  credit.  The  retailers,  in  turn,  had 
large  outstanding  accounts  receivable  which  were  quite 
•certain  to  be  collected  with  a  satisfactory  change  in 
the  cotton  market,  but  they  did  not  have  any  ready 
funds  to  pay  the  Southern  jobbers.  Some  of  these 
jobbers  consequently  could  not  pay  the  northern  manu- 
facturers, and  sought  extensions  for  from  six  to  twelve 
months,  offering  their  notes  to  the  manufacturers.  The 
manufacturers,  almost  to  a  man,  quickly  saw  the  situ- 
ation and  recognized  the  cause  of  the  Southern  job- 
bers' difficulties.  Extensions  were  willingly  granted 
and  the  jobbers'  credit  standings  remained  unimpaired. 
Eventually,  with  a  favorable  change  in  the  price  of  cot- 
ton, the  jobbers,  collecting  from  the  retailers,  paid 
their  debts  and  continued  their  business  relations  with 
the  manufacturers. 

THE  SITUATION  OF  A  METROPOLITAN  STORE 

A  very  interesting  illustration  of  the  embarrassment 
of  a  debtor  as  the  result  of  improper  collection  methods 


312  CREDITS  AND  COLLECTIONS 

is  the  case  of  a  large  metropolitan  department  store. 
This  store  is  one  of  the  foremost  concerns  in  its  city. 
It  caters  largely  to  a  very  wealthy  class  of  customers, 
and  the  majority  of  its  sales  are  made  on  credit.  For 
fear  of  offending  its  wealthy,  and  presumably  aristo- 
cratic, customers,  the  store  never  sent  statements,  but 
relied  entirely  on  the  purely  voluntary  act  of  its  cus- 
tomers to  pay  their  bills.  This  exceedingly  lax  method 
of  collecting  accounts  necessarily  encouraged  the  cus- 
tomers to  procrastinate  making  payments.  This  com- 
pelled the  store  to  borrow  frequently  and  in  large 
amounts  at  a  local  bank.  With  the  proceeds  of  the 
bank  loans  the  store  paid  its  merchandise  bills  very 
promptly  and  maintained  a  high  credit  rating  among 
the  trade. 

For  some  unexplained  reason,  possibly  because  of 
the  careless  collection  methods  of  the  store,  the  bank 
refused  to  make  any  further  loans  to  the  store.  Of 
course  the  store  found  it  impossible  to  borrow  at  any 
other  local  bank  at  that  time,  for  the  mere  fact  that 
the  bank  which  had  been  lending  the  store  money  over 
a  great  number  of  years  had  suddenly  shut  down  on 
the  store,  would  prove  a  sufficient  deterrent  to  other 
banks. 

In  a  reckless  attempt  to  maintain  its  credit  standing 
the  store  committed  the  serious  tactical  error  of  endeav- 
oring to  pay  its  few  large  creditors  promptly  and  de- 
laying the  payment  of  numerous  small  creditors.  This 
is  a  grave  mistake  for  any  debtor  to  make,  for  the 
reason  that  in  case  of  financial  difficulty  he  will  find  it 
almost  impossible  to  come  to  any  satisfactory  under- 
standing with  numerous  small  creditors  whose  first  in- 


EXTENSIONS,  COMPOSITIONS,  ETC.      313 

spiration,  when  a  debtor  becomes  embarrassed,  is  to 
turn  the  account  over  to  a  lawyer.  And  unfortunately 
these  small  creditors  seem  to  be  unusually  successful 
in  selecting  either  lawyers  who  are  thoroughly  un- 
scrupulous and  whose  sole  ambition  is  to  add  to  the 
intricacies  of  the  situation  (and  to  their  fees)  and  tear 
down  business  structures,  or  lawyers  who  are  entirely 
devoid  of  sound  business  judgment.  Fortunately  this 
class  of  lawyers  is  probably  in  the  minority. 

On  the  other  hand  where  the  number  of  creditors 
is  small,  the  debtor  has  no  such  unwieldy  mass  to  deal 
with.  Then,  too,  large  creditors  usually  have  credit 
men  who  prefer  to  take  the  situation  in  hand  them- 
selves, without  calling  in  any  outside  attorneys  whose 
presence  might  complicate  matters.  For  these  reasons, 
a  debtor  who  is  compelled  to  seek  the  co-operation  of 
his  creditors  will  do  well  first  to  dispose  of  the  nu- 
merous small  creditors,  and  then  present  his  case  to 
the  small  number  of  large  creditors. 

Returning  to  the  situation  of  the  metropolitan  store, 
when  the  small  creditors  found  they  were  not  being 
paid  promptly,  they  soon  began  to  circulate  rumors 
that  the  store  was  getting  into  financial  difficulties,  and 
the  credit  reputation  of  the  store  began  to  weaken. 
These  rumors  in  a  short  time  came  to  the  attention 
of  the  large  creditors.  The  large  creditors  called  the 
managers  of  the  store  to  account  for  the  rumors.  The 
store  managers  willingly  exposed  the  store's  condition 
to  the  large  creditors,  permitted  the  creditors  to  in- 
vestigate the  afifairs  of  the  store,  and  asked  the  cred- 
itors' advice.  The  creditors  found  the  condition  of 
the  store  quite  satisfactory,  except  for  the  method  of 


314         CREDITS  AND  COLLECTIONS 

collecting  accounts.  The  large  creditors  advised  the 
store  to  pay  all  the  small  creditors  immediately.  This 
effectively  stopped  the  rumors  that  had  been  circulat- 
ing and  tended  to  save  the  credit  of  the  store.  The 
large  creditors,  after  the  store  had  agreed  to  adopt 
better  collection  practises,  consented  to  grant  an  ex- 
tension of  time  to  the  store.  Thus,  through  the  judi- 
cious action  of  the  large  creditors,  this  store  was  prob- 
ably saved  from  failure,  and  all  creditors  were  paid  in 
full. 

LEGAL  ASPECTS  OF  EXTENSIONS 

The  question  may  arise,  in  the  minds  of  either  the 
creditors  or  debtors,  whether  an  agreement  for  an  ex- 
tension of  time  is  binding  on  the  creditors.  Every  con- 
tract or  agreement  to  be  binding  must  be  supported  by 
some  consideration.  Obviously  an  agreement  by  one 
creditor  to  give  a  debtor  an  extension  of  time,  without 
any  consideration,  is  not  binding  on  the  creditor. 
Where,  however,  several  creditors  agree  among  them- 
selves and  with  the  debtor,  that  in  consideration  of 
each  creditor's  forbearance  each  of  the  other  creditors 
will  agree  to  an  extension,  there  is  sufficient  considera- 
tion to  support  the  promise  of  each  creditor;  and  no 
one  creditor,  at  least  without  the  consent  of  all  others, 
would  have  the  right  to  demand  payment  before  the 
extended  time  had  elapsed. 

In  any  event,  if  the  extension  is  accomplished  by  the 
debtor  giving  the  creditor  a  note,  the  creditor  wculd 
have  to  wait  until  the  due  date  of  the  note  to  bring 
any  action  against  the  debtor.  The  giving  and  accept- 
ance of  the  note  in  place  of  the  old  account  is  prac- 


EXTENSIONS,  COMPOSITIONS,  ETC.      315 

tically  the  substitution  of  a  new  contract  for  an  old 
one  and,  therefore,  binding  on  both  parties.  Again, 
where  the  debtor  gives  security  or  obtains  a  guarantor 
in  consideration  for  extension  of  time  granted,  the 
agreement  is  supported  by  sufficient  consideration  and, 
therefore,  binding. 


COMPOSITION    SETTLEMENTS 

Under  certain  circumstances  it  would  be  unwise  for 
creditors  to  grant  an  extension.  This  is  obviously 
true,  for  example,  where  a  debtor's  statement  discloses 
an  actual  deficit,  or  where  the  surplus  of  assets  is 
negligible,  or  where  the  assets,  even  though  considera- 
bly more  than  the  liabilities,  are  made  up  largely  of 
fixed  assets  not  readily  convertible  into  cash.  Under 
such  conditions,  simply  to  grant  an  extension  would 
hardly  be  an  adequate  remedy.  The  extension  will  not 
enable  the  debtor  to  present  any  better  statement  nor 
to  increase  his  working  capital.  As  a  result  his  credit 
will  be  so  seriously  injured  and  his  buying  so  seriously 
restricted  that  he  will  find  himself  going  from  bad  to 
worse.  More  heroic  measures  are  necessary  if  the 
debtor  is  to  be  saved  from  bankruptcy,  and  enabled  to 
continue  business. 

One  adequate  remedy  is  the  common  law  or  com- 
position settlement.  This  is  an  agreement  between  the 
debtor  and  several  of  his  creditors  (not  necessarily  all, 
but  a  number,  two  or  more)  whereby  each  of  the  cred- 
itors in  consideration  of  each  other's  promise,  agrees 
to  release  the  del)tor  from  the  entire  debt  upon  receiv- 
ing partial  payment  from  the  debtor.    The  mere  agree- 


3i6         CREDITS  AND  COLLECTIONS 

ment  of  one  creditor  alone,  and  not  in  consideration 
of  other  creditors'  promises,  would  not  be  binding  on 
that  creditor.  It  is  essential  that  two  or  more  creditors 
enter  into  the  agreement. 

The  composition  settlement  is  usually  brought  about 
on  the  initiative  of  the  debtor,  who  submits  a  proposi- 
tion to  his  creditors  offering  to  pay  a  certain  percentage 
of  their  claims.  The  proposal  may  be  made  directly 
by  the  debtor  or  through  the  instrumentality  of  his 
attorney,  either  to  the  creditors  individually  or  at  a 
meeting  of  creditors  called  for  the  purpose.  This  kind 
of  settlement  is  always  very  difficult  to  arrange  when 
the  creditors  are  very  numerous,  for,  among  many, 
there  are  quite  likely  to  be  one  or  more  disgruntled 
creditors  who  insist  upon  full  payment.  Where,  how- 
ever, the  creditors  are  few  in  number,  and  friendly 
toward  the  debtor,  not  many  obstacles  will  be  met  in 
bringing  about  an  equitable  settlement. 

WHEN  TO  AGREE  TO  A  COMPOSITION 

This  form  of  settlement  is  highly  to  be  commended, 
and  the  creditors  should  agree  to  such  a  settlement, 
under  proper  conditions,  for  two  reasons. 

First.  This  form  of  settlement  is  due  to  the  honest 
debtor.  The  creditor  is  in  a  way  a  partner  in  the 
debtor's  business,  and  losses  must  be  expected  in  busi- 
ness. An  honest  debtor's  offer  should  be  encouraged 
and  accepted,  so  that  the  debtor  may  regain  his  busi- 
ness and  save  himself  and  family  from  disaster. 

Second.  It  is  to  the  interest  of  the  creditor  to  have 
a  settlement  made  in  this  form.     To  illustrate,  let  us 


EXTENSIONS,  COMPOSITIONS,  ETC.      317 

assume  that  a  merchant  has  a  business  which  shows  a 
relation  of  75%  assets  to  liabilities.  The  business  may 
be  worth  75%  of  the  liabilities  as  a  going  concern. 
But  in  forced  liquidation  the  assets  would  realize  much 
less  than  their  book  value.  If  the  business  went 
through  bankruptcy,  the  creditors  would  consider 
themselves  fortimate  to  receive  twenty  per  cent.  How 
much  more  fortunate  is  the  creditor  who  accepts  a 
settlement  of  forty  per  cent  and  leaves  the  debtor 
thirty-five  per  cent  to  continue  and  rehabilitate  his 
business !  Moreover,  the  loss  sustained  by  the  creditor 
may  be  recouped  in  future  sales  to  the  debtor.  This 
would  be  quite  unlikely,  if  not  impossible,  were  the 
debtor  forced  through  bankruptcy.  Then,  too,  bank- 
ruptcy proceedings  use  up  the  time  of  all  parties  and 
cause  many  creditors  considerable  trouble  and  worry, 
all  of  which  is  dispensed  with  through  a  common  law 
settlement. 

To  summarize,  an  honest  debtor  is  rightfully  en- 
titled to  a  composition  settlement.  However,  before 
accepting  an  offer  of  settlement  the  creditors  should 
obtain  full  and  complete  information  regarding  the 
debtor's  affairs,  and  assure  themselves  beyond  a  rea- 
sonable doubt  that  there  is  an  entire  absence  of  fraud. 
If  the  credit  man  discovers  any  trace  of  fraud  he 
should  absolutely  refuse  to  grant  an  extension  or  agree 
to  an  extension.  Let  him  relentlessly  prosecute  the 
fraudulent  debtor  to  the  full  extent  of  the  law.  This, 
to  the  individual  creditor,  may  be  very  expensive  in 
the  immediate  case,  but  eventually  the  money  spent  in 
prosecuting  this  fraudulent  debtor  will  pay  large  divi- 
dends, for  the  reputation  gained  from  prosecuting  the 


3i8         CREDITS  AND  COLLECTIONS 

fraudulent  debtor  will  have  a  salutary  effect  upon  all 
other  frauds.  They  will  take  care  to  see  that  this  cred- 
itor is  omitted  from  their  list  of  creditors. 


LEGAL  ASPECTS  OF  A  COMPOSITION 

We  have  already  pointed  out  that  the  consideration 
for  a  composition  agreement  which  makes  it  binding 
on  the  parties  is  the  promise  of  each  creditor  in  con- 
sideration for  the  promise  of  all  the  other  creditors 
signing  the  composition  agreement.  It  is  to  be  pointed 
out  here,  however,  that  the  composition  need  be  in 
no  particular  form.  It  may  be  a  formal  instrument 
under  seal  or,  unless  otherwise  provided  by  the  stat- 
utes of  the  state,  it  may  be  in  the  form  of  a  simple, 
written  instrument  or  even  an  oral  agreement.  Nor 
is  it  necessary  in  order  to  make  the  agreement  valid 
that  all  or  even  a  greater  part  of  the  creditors  should 
join,  unless  this  is  required  by  the  agreement.  Of 
course,  any  creditor  may  make  this  a  condition 
precedent  to  his  entering  into  the  agreement. 

All  creditors  must  share  equally  in  the  distribution 
of  the  assets  and  in  every  other  respect  and  any  ad- 
vantage given  to  one  or  more  of  the  creditors  without 
the  consent  of  the  others  will  avoid  the  composition 
agreement.  However,  the  creditors  may,  among  them- 
selves, agree  to  allow  one  creditor  to  receive  more  than 
the  others. 

In  carrying  out  the  terms  of  the  composition  agree- 
ment, it  is  absolutely  essential  that  they  be  performed 
punctually  and  strictly  in  accordance  with  the  terms 
of  the  agreement.    The  composition  money,  or  any  in- 


EXTENSIONS,  COMPOSITIONS,  ETC.      319 

stallment,  if  the  composition  happens  to  be  payable  in 
installments,  must  be  paid  punctually  at  the  time  speci- 
fied by  the  agreement.  Moreover,  any  note  or  bill 
called  for  by  the  agreement  must  be  delivered  at  the 
time  and  in  the  manner  specified,  and  must  be  paid 
promptly  when  due.  Should  any  of  these  require- 
ments not  be  fulfilled,  the  creditors,  or  any  one  of 
them,  would  have  the  right  to  consider  the  agreement 
broken  and  to  immediately  begin  an  action  for  the  re- 
''overy  of  the  original  indebtedness. 

ADJUSTMENT  BUREAUS 

To  secure  the  effective  co-operation  of  creditors  in 
dealing  with  embarrassed  debtors,  credit  men's  asso- 
ciations and  trade  organizations  have  established  ad- 
justment bureaus.  The  purposes  of  these  bureaus  may 
be  summarized  as  follows : 

1.  To  investigate,  upon  request,  the  affairs  of  a 
debtor  reported  to  be  insolvent  and  adjust  the  estate, 
when  possible  without  court  proceedings. 

2.  To  secure  capable  and  efficient  receivers,  apprais- 
ers or  trustees  when  court  proceedings  are  found  to  be 
necessary. 

3.  To  secure  quick  adjustment  of  all  honest  failures 
at  the  minimum  cost  and  with  the  ma.ximum  dividend 
to  creditors. 

4.  To  facilitate  and  economically  to  secure  exten- 
sions or  liquidations  when,  upon  investigation,  it  is 
found  to  be  to  the  best  interests  of  all. 

5.  To  influence  concerted  action  by  the  creditors  for 
the  benefit  of  all. 


320         CREDITS  AND  COLLECTIONS 

6.  To  assist  creditors  to  acquire  for  their  own  use 
the  estate  of  faiHng  or  insolvent  debtors,  when  mu- 
tually agreed  upon. 

7.  To  prosecute  or  assist  in  the  prosecution  of  the 
guilty  party  or  parties  where  investigation  discloses 
fraud  or  the  intent  to  defraud.^ 

ADVANTAGES  OF  THE  ADJUSTMENT  BUREAU 

To  summarize,  the  adjustment  bureau  seeks  to  rep- 
resent and  act  as  agent  for  all  creditors  of  an  embar- 
rassed or  insolvent  account  and  attempts  to  secure  for 
each  creditor  the  most  satisfactory  form  of  settlement. 
Practically,  the  adjustment  bureau  takes  the  place  of  a 
committee  of  creditors,  but  is  usually  better  equipped 
than  the  committee,  by  reason  of  its  better  facilities 
and  wider  experience  in  treating  with  insolvent  debt- 
ors. Moreover,  the  adjustment  bureau  has  developed 
a  valuable  organization  of  adjusters,  appraisers,  and 
attorneys  that  can  be  called  into  service  the  moment 
the  occasion  requires. 

When  an  extension  or  common  law  composition  is 
desirable  the  adjustment  bureau  can  play  a  valuable 
part.  As  most  credit  men  have  experienced,  a  settle- 
ment of  this  kind  presented  to  the  individual  creditors 
by  the  debtor  will  usually  meet  with  serious  opposition 
from  a  few  creditors ;  furthermore,  a  number  of  in- 
different creditors  may  retard  the  consummation  of 
the  settlement  by  neglecting  to  give  their  assent.  Par- 
ticularly is  this  true  when  there  are  numerous  cred- 

^  Bulletin  of  National  Association  of  Credit  Men,  July, 
1906. 


EXTENSIONS,  COMPOSITIONS,  ETC.      321 

itors  who  are  located  at  a  distance  from  the  debtor. 
When,  however,  after  a  careful  examination  of  the 
debtor's  affairs,  the  extension  or  composition  is  recom- 
mended by  the  adjustment  bureau,  most  creditors,  if 
not  all,  will  consent  to  the  arrangement  suggested  by 
the  bureau.  In  the  first  place,  the  creditors  feel  a 
strong  moral  obligation  to  do  this,  and  secondly,  the 
creditors  realize  that  the  bureau  is  obtaining  for  them 
probably  the  most  advantageous  settlement  possible. 

WINDING   UP   AN   ESTATE 

In  place  of  an  extension  or  composition  settlement 
it  may  be  thought  more  desirable  to  wind  up  the  af- 
fairs of  the  debtor,  sell  out  his  property,  and  distribute 
the  proceeds  pro  rata  among  all  the  creditors.  This 
result  can,  of  course,  be  accomplished  through  bank- 
ruptcy proceedings.  But  the  objection  to  these  pro- 
ceedings is  threefold :  first,  bankruptcy  leaves  a  stain 
on  the  business  name  of  the  debtor;  second,  the  fees  to 
attorneys  and  officials  eat  up  a  considerable  part  of 
the  estate,  and  third,  the  trustee,  whose  duty  it  is  to 
dispose  of  the  assets  of  the  debtor,  often  lacks  either 
the  ability  or  the  time  to  sell  the  assets  in  the  most 
advantageous  manner. 

The  plan  of  the  adjustment  bureau,  while  retaining 
the  sound  and  beneficial  principle  of  pro  rata  distribu- 
tion of  the  debtor's  assets,  dispenses  with  the  serious 
objections  to  bankruptcy  administration  of  the  in- 
solvent's estate.  Their  plan  embraces  the  surrender  by 
a  debtor  of  his  property  to  a  trustee,  a  representative 
of  the  adjustment  bureau,  for  the  benefit  of  all  cred- 


322         CREDITS  AND  COLLECTIONS 

itors.  It  is  a  voluntary  assignment  apart  from  any- 
legal  proceeding.  The  debtor,  by  plain  bill  of  sale  or 
deed  of  assignment  in  simple  form,  conveys  his  prop- 
erty to  a  trustee,  authorizing  the  trustee  as  attorney 
in  fact  to  take  possession  of  the  property  and  convert 
the  same  into  money,  and  after  the  payment  of  the 
necessary  expenses,  to  distribute  the  proceeds  pro  rata 
among  the  creditors,  who  in  consideration  thereof 
agree  to  release  the  debtor  from  further  liability. 

This  proceeding  is  subject  to  legal  attack,  and  must 
and  does  rest  upon  the  co-operation  of  creditors.  To 
avoid  any  possible  legal  entanglements,  such  as  bank- 
ruptcy, the  consent  of  all  creditors  should  be  obtained 
to  the  assignment  and  release.  For  this  consent  the  re- 
sults obtained  in  the  form  of  larger  dividends  are  usu- 
ally a  sufficient  inducement.  Where,  however,  certain 
creditors  refuse  to  enter  into  the  equitable  spirit  of 
the  agreement,  and  insist  on  being  paid  in  full,  there 
is  nothing  for  the  adjustment  bureau  to  do  but  to 
threaten  to  file  a  petition  in  bankruptcy.  This  will  or- 
dinarily bring  the  recalcitrant  creditors  to  terms,  for 
even  they  realize  that  the  dividends  would  be  consid- 
erably reduced  if  the  debtor's  estate  were  to  pass 
through  bankruptcy.  If  the  threat  itself  is  unavailing, 
the  bureau  will  see  the  petition  is  filed  either  by  the 
creditors  or  by  the  debtor  himself. 

ACTIVITY  IN  BANKRUPTCY  CASES 

When  bankruptcy  cannot  be  avoided,  either  on  ac- 
count of  conflicting  interests  among  creditors,  or  their 
attorneys,  or  because  the  debtor  himself  has  filed  a 


EXTENSIONS,  COMPOSITIONS,  ETC.     323 

voluntary  petition,  the  adjustment  bureau  can  be  of 
expert  assistance  in  representing"  creditors  at  creditors' 
meetings,  and  especially  in  the  election  of  a  trustee  who 
can  best  serve  the  interests  of  the  creditors.  This  trus- 
tee may  well  be  and  often  is  a  representative  of  the 
bureau,  in  which  case  the  bureau's  experts  aid  in  ob- 
taining the  highest  prices  for  the  debtor's  assets  and 
in  keeping  down  the  cost  of  administration  to  a  mini- 
mum. 

ADJUSTMENT    PROCEDURE 

Upon  the  request  of  one  or  more  creditors  the  ad- 
justment bureau,  after  consultation  with  other  cred- 
itors, makes  a  thorough  investigation  into  the  affairs 
of  the  debtor.  As  a  result  of  the  examination,  the  bu- 
reau makes  its  recommendations  to  the  creditors.  If  a 
composition  settlement  is  thought  desirable,  the  bureau 
makes  every  effort  to  effect  a  satisfactory  arrangement. 

If  an  extension  is  to  be  arranged,  one  of  several 
methods  may  be  followed.  A  trust  agreement  may  be 
entered  into  between  the  debtor  and  the  bureau  on  be- 
half of  the  creditors.  The  agreement  may  provide 
for  a  continuation  of  the  business  either  by  the  debtor 
himself  or  by  a  representative  of  the  bureau.  In  the 
latter  case  the  debtor  might  be  retained  as  an  employee, 
until  the  debts  were  all  paid,  the  business  then  to  be 
returned  to  the  debtor.  The  success  of  this  latter 
method  depends  entirely  on  the  ability  of  the  bureau's 
manager  and  representatives.  Efficient  merchandising 
men  could  reduce  store  expenses,  stop  leaks,  collect  out- 
standings, increase  sales,  and  turn  back  to  the  debtor  a 
rehabilitated  business. 


324         CREDITS  AND  COLLECTIONS 

When  an  extension  agreement  is  decided  upon,  the 
bureau  usually  asks  the  creditors  to  assign  their  claims 
to  it.  This  accomplished,  the  debtor  has  only  one  cred- 
itor instead  of  a  great  number,  and  neither  the  cred- 
itors nor  the  debtor  are  in  constant  apprehension  of 
one  or  two  creditors  insisting  upon  payment  and  taking 
drastic  action  at  any  time.  As  the  money  is  received 
by  the  bureau  from  the  debtor  or  from  the  sale  of  the 
debtor's  stock,  dividends  are  distributed  pro  rata 
among  all  the  creditors. 

If  it  is  considered  better  to  wind  up  the  business  of 
the  debtor,  an  assignment  is  made  by  him  to  the  bureau 
as  trustee.^ 

The  bureau  takes  charge  of  the  store  of  the  debtor 
and  makes  an  inventory  of  the  stock  and  equipment. 
The  store  is  arranged  as  attractively  as  possible  for  the 
reception  of  prospective  purchasers  of  the  stock.  De- 
pending on  the  circumstances  of  the  case  the  bureau 
may  then  do  one  of  four  things. 

1.  It  may  sell  the  goods  and  fixtures  at  public  auc- 
tion. 

2.  It  may  sell  the  stock  in  job  lots,  to  buyers  of 
bankruptcy  stocks  and  to  storekeepers  at  private  sale. 
This  method  has  usually  produced  better  results  than 
public  auction. 

3.  It  may  continue  the  business,  gradually  disposing 
of  the  stock  at  retail.  If  this  is  done  new  merchandise 
must  be  purchased  from  time  to  time  to  replenish  the 
stock,  and  the  creditors  must  wait  until  all  or  most  of 
the  goods  are  sold  before  any  dividends  are  received. 

^  See  page  323,  ante. 


EXTENSIONS,  COMPOSITIONS,  ETC.      325 

One  advantage  of  this  method  is  that  higher  prices  may- 
be realized  on  the  stock. 

Whichever  method  is  followed,  the  creditors  are 
usually  compelled  to  wait  at  least  four  months  after 
the  assignment  before  they  receive  any  dividends.  This 
is  for  the  reason  that  the  adjustment  bureau  does  not 
want  to  assume  any  risk  should  certain  previously 
unheard  of  creditors  appear  and  demand  payment, 
after  the  debtor's  estate  has  been  wound  up  but  before 
the  four  months'  period  has  elapsed.  These  creditors 
could  file  a  petition  in  bankruptcy  and  set  aside  the 
assignment,  as  a  preference,  and  compel  the  adjust- 
ment bureau  to  account  for  the  money  received  from 
the  sale  of  the  bankrupt's  property.  The  bureau  would 
then  be  in  a  very  embarrassing  position,  if  it  had  al- 
ready distributed  the  money.  For  this  reason  the  bu- 
reau makes  no  payments  to  creditors  until  at  least  four 
months  after  the  assignment. 

ADJUSTMENT  BUREAU  RESULTS 

From  an  economic  point  of  view  the  figures  pre- 
sented by  the  various  adjustment  bureaus  justify  be- 
yond any  doubt  the  existence  of  these  bureaus.  The 
average  dividends  paid  to  creditors  in  winding  up  es- 
tates have  been  considerably  higher  than  in  bankruptcy 
cases  carried  through  the  courts.  In  many  instances, 
dividends  distributed  by  the  bureau  have  amounted  to 
100%,  the  full  amount  of  the  creditors'  claims.  Even 
in  bankruptcy,  the  presence  of  the  adjustment  bureau 
has  usually  resulted  in  larger  dividends  for  creditors. 

Figures    from   the   Report   of   the   Spokane   Mer- 


326         CREDITS  AND  COLLECTIONS 

chants'  Association  for  the  year  191 1  are  typical  and 
instructive. 

Cash  received  outside  of  bankruptcy $440,292.95 

Cash  disbursed  to  creditors 424,558.89 

$15,734.06 
Expense  for  collection  and  distribution.  .  .      15,329.61 

Cases  paid  in  full,  191 1 18 

Average  paid  to  creditors  in  84  cases  closed 

by  Association 54-^% 

The  above  record  may  be  compared  with 
Spokane  bankruptcy  cases : 

Total  Asset  cases  in  bankruptcy  closed  in 

1911 17 

Average  paid 9J/2  % 

Average  paid  in  bankruptcy  cases  con- 
trolled by  Association 24.4% 

Largest  paid  in  any  case 39-4% 

FUTURE  OF  THE  ADJUSTMENT  BUREAU 

With  bureaus  exhibiting  records  like  the  above, 
there  is  every  reason  to  believe  that  the  future  holds 
out  the  brightest  prospects  for  their  continued  success- 
ful development.  Already  there  are  approximately 
fifty  bureaus  distributed  over  twenty-five  states  affili- 
ated with  local  Credit  Men's  Associations,  and  we  may 
reasonably  expect  to  see  an  increment  in  their  number 
and  an  improvement  in  the  quality  of  many  of  them. 


CHAPTER  XVII 

BANKRUPTCY,  INSOLVENCY  AND 
RECEIVERSHIPS 

IMPORTANCE  OF  BANKRUPTCY  LAWS 

Businesses  that  are  financially  embarrassed  may  be 
said  to  be  sick,  and  in  relation  to  them  the  credit  man 
may  be  said  to  be  a  nurse,  the  lawyer  a  doctor  and  the 
courts  hospitals.  Without  wishing  to  carry  the  analogy 
too  far,  it  may  be  pointed  out  that  the  modern  nurse 
comes  very  near  to  being  a  doctor ;  certainly  her  training 
is  more  complete  than  was  that  of  the  doctor  fifty  years 
ago.  Indeed  the  more  she  knows  of  the  art  and  practice 
of  the  physician  the  more  valuable  nurse  she  may  be. 
And  if  she  should  specialize  in  certain  kinds  of  cases  it 
is  probable  that  she  will  know  more  about  them  than  does 
the  average  practicing  physician. 

The  credit  man  needs,  to  be  sure,  to  know  something 
about  the  laws  of  contracts,  liens  and  negotiable  instru- 
ments, but  his  experience  in  bankruptc}-,  if  coupled  with 
a  reasonable  study  of  the  law  of  bankruptcy  should  make 
him  a  specialist  to  whom  the  average  lawyer  in  general 
practice  can  look  to  as  a  peer. 

There  are  a  number  of  reasons  why  the  credit  man 
should  make  a  careful  study  of  bankruptcy  law.     Not 

327 


328         CREDITS  AND  COLLECTIONS 

the  least  reason  is  that  it  is  somewhat  complex  and  tech- 
nical and  therefore  interesting.  Moreover  the  bank- 
ruptcy courts  are  apt  to  be  the  battlegrounds  of  the  credit 
man's  real  struggles  to  defend  the  interests  of  his  house. 
Then,  too,  it  should  be  pointed  out  clearly  to  the  credit 
man,  that  he  represents  perhaps  the  strongest  influence 
protecting  the  interests  of  the  creditor  class.  It  is  not 
necessary  to  enter  upon  any  discussion  of  capitalistic  in- 
terests and  anti-capitalistic  claims  when  it  is  desired 
to  point  out  that,  historically  at  any  rate,  there  has 
always  been  a  tendency  for  creditor  and  debtor  classes 
to  seek  legislation  favoring  their  respective  interests  and 
that  in  the  interest  of  fair  dealing,  business  prosperity 
and  economic  progress  it  is  clearly  up  to  the  credit  man 
to  see  that  fraud  is  not  tolerated  by  our  laws,  that  a 
premium  is  not  put  on  irresponsibility  and  that  the  tem- 
pering of  justice  with  mercy  is  not  carried  to  the  point 
where  chicanery  can  hide  behind  the  skirts  of  pity. 

HISTORY  OF  BANKRUPTCY  ACTS 

Another  reason  that  will  impel  the  generous  credit  man 
to  take  a  scholarly  interest  in  bankruptcy  legislation  is 
the  opportunity  which  a  study  of  bankruptcy  history 
aflfords  to  appreciate  the  progress  the  human  race  has 
made  in  treating  debtors  sympathetically  if  they  deserve 
sympathy — rather  than  harshly  and  with  the  austerity 
usually  reserved  for  criminals  alone. 

Practically  at  all  times  in  the  past  debtors  have  been 
regarded  as  social  parasites.  One  instance  of  the  legal 
theory  of  by-gone  days  must  suffice.  Prior  to  the  first 
modern  bankruptcy  act,  that  is  the  Act  of  Henry  VIII, 


BANKRUPTCY,  INSOLVENCY,  ETC.  329 

1542,  there  appears  to  have  been  no  statute  providing  for 
imprisonment  for  debt.  Still  by  legal  fiction  imprison- 
ment often  took  place.  Thus  the  refusal  of  the  debtor  to 
pay  his  debt  was  sometimes  treated  as  a  breach  of  the 
peace,  and  again  as  an  attack  on  the  king's  revenues,  since 
the  failure  of  a  debtor  to  pay  his  debts  tended  to  prevent 
the  barons,  who  were  most  frequently  the  creditors,  from 
discharging  their  obligations  to  the  crown. 

Indeed  as  far  back  as  the  days  of  Draco,  the  famous 
Greek  tyrant,  debtors  were  dealt  with  harshly.  Death  and 
slavery — the  latter  not  only  for  the  debtor,  but  for  his 
family  as  well — were  the  alternatives  to  complete  pay- 
ment of  debts.  About  200  years  later  (b.  c.  450)  the 
Roman  Laws  of  the  Twelve  Tables  provided  a  treatment 
for  debtors  so  barbarous  that  many  modern  commentators 
cannot  believe  the  most  drastic  provisions  were  even  en- 
forced. The  debtor  was  imprisoned  and  for  a  period  of 
thirty  days  was  thrice  exposed  in  the  marketplace  in 
stocks  and  chains  to  arouse  the  sympathy  of  friends  and 
relatives  who  might  be  thus  prevailed  upon  to  pay  the 
miserable  man's  debts.  The  utmost  terror  of  the  law  was 
a  provision  giving  the  creditor  the  right  to  chop  the 
"debtor's  body  into  proportionate  shares."  ^ 

The  Cessio  Bonorum,  from  which  statute,  bankruptcy 
laws  are  often  said  to  have  descended,  was  probably  pro- 
mulgated by  Caesar  himself.  Curiously  enough  this 
statute  dealt  with  a  problem  that  has  recently  obtained  so 
much  notice,  the  change  in  one's  financial  condition  due 
to  changes  in  the  general  price  level ;  it  was  provided  in 

1  The  author  is  indebted  to  a  recent  publication — the  scholarly 
thesis  of  F.  Regis  Noel,  LL.B.,  Ph.D.,  entitled  A  History  of  the 
Bankruptcy  Lazv—ior  the  details  of  this  historical  sketch. 


330         CREDITS  AND  COLLECTIONS 

Cessio  Bonorum  that  the  debtor  might  surrender  his  lands 
at  the  pre-war  valuation.  While  this  statute  did  not  pro- 
vide for  a  discharge  of  the  debtor's  obligations  without 
full  payment,  the  principle  of  discharge  did  arise  at  about 
the  same  time,  and  was  invoked  as  an  aid  to  debtors  who 
assisted  in  the  Civil  Wars. 

The  first  modern  statute  in  England,  that  of  1542,  was 
intended  primarily  to  prevent  fraud.  It  was  what  might 
be  termed  a  "creditor's  statute."  It  applied  to  those  who 
"craftily  obtaining  into  their  hands  great  substance  of 
other  men's  goods,  .  .  .  suddenly  flee  to  parts  unknown 
or  keep  to  their  houses,  not  minding  to  pay  or  restore  to 
their  creditors  their  debts  and  duties,  but  at  their  own  will 
and  pleasure  consume  the  substance  obtained  by  credit  of 
other  men,  for  their  own  pleasure  and  delicate  living 
against  all  reason,  equity,  and  good  conscience."  Other 
English  statutes  were  passed  from  time  to  time  but  all  were 
directed  against  fraudulent  debtors,  especially  abscond- 
ing debtors.  It  was  not  until  1705,  in  the  reign  of  Queen 
Anne,  that  the  debtor  received  consideration  from  Eng- 
lish statute,  when  for  the  first  time  provision  was  made 
for  giving  debtors  a  clean  bill  of  health  upon  their  satisfy- 
ing the  provisions  of  the  law.  This  statute  too,  probably 
marks  the  beginning  of  exemptions,  i.e.,  of  the  allowance 
of  certain  essential  property  to  the  debtor  that  he  might 
begin  his  economic  career  over  again  with  some  fair 
chance  of  success.  The  present  English  law  consists  of 
a  consolidation  of  statutes  in  1883,  amended  by  a  law  of 
1914.  The  English  and  the  American  bankruptcy  rules 
have  come  to  be  very  similar,  due  undoubtedly  to  mutual 
imitation. 


BANKRUPTCY,  INSOLVENCY,  ETC.  331 

BANKRUPTCY  LAWS  IN  AMERICA 

When  the  constitution  was  adopted  it  contained  a  clause 
giving  Congress  power' to  establish  "uniform  laws  on  the 
subject  of  bankruptcies  throughout  the  United  States." 
(Section  VIII  of  Article  i).  This  clause  has  been  inter- 
preted to  mean  that  when  Congress  does  pass  an  act  of 
bankruptcy,  it  supersedes  any  ict  of  the  states.  The  fed- 
eral bankruptcy  acts,  of  which  the  present,  passed  in  1898 
and  amended  in  1903,  in  1906  and  in  1910,  is  the  fourth, 
are  distinguished  from  state  laws  usually  by  terming  the 
latter  insolvency  laws.  Most  states  now  have  such  laws 
on  their  statute  books,  but  they  are  held  in  suspense.  It  is 
to  be  hoped  that  the  federal  government  will  never  again 
permit  us  to  rely  upon  the  confused  system  of  diverse  state 
laws  and  we  may  therefore  pass  over  entirely  the  subject 
of  state  enactments. 

WHAT  IS   MEANT  BY  BANKRUPTCY 

Having  briefly  reviewed  the  history  of  bankruptcy  leg- 
islation we  may  pause  a  while  to  examine  the  word 
"bankruptcy"  itself.  The  etymology  of  the  word  is 
somewhat  in  dispute,  but  the  following  explanation  has 
perhaps  as  good  authority  behind  it  as  any  other. 

Most  readers  will  remember  the  story  of  how  Jesus 
drove  the  money  changers  from  the  temple.  We  are  told 
that  it  was  an  Hebraic  custom  to  require  the  deposit  in 
the  temple  at  certain  times  of  sums  of  money  in  Hebraic 
currency.  Since  Roman  coins  were  most  frequently  used, 
money  changers  set  up  their  tables  or  benches  (bank)  on 
which  they  kept  their  supply  of  Hebraic  coins  to  be  bought 


332         CREDITS  AND  COLLECTIONS 

in  Roman  money.  To  this  practice  naturally  was  added 
the  function  of  lending  money.  Sometimes  the  changer's 
ventures  along  these  lines  proved  disastrous,  and  he  found 
himself  owing  more  than  he  owned.  To  prevent  further 
calamity,  his  creditors  drove  him  from  his  business  and 
literally  broke  or  rupted  his  bench.  He  was  "bench-brok- 
en"— bankrupted. 

Now  the  importance  of  this  explanation  is  that  it  shows 
that  even  in  those  early  days  bankruptcy  consisted  of  a 
condition  coupled  with  an  outward  action  to  indicate  the 
existence  of  that  condition — insolvency  and  the  break- 
ing of  the  bench.  Today  bankruptcy  consists  of  a  con- 
dition and  an  action;  the  condition  is  the  same — insol- 
vency; the  action,  however,  is  a  decree  of  bankruptcy 
handed  down  by  a  bankruptcy  court  and  not  the  old  phy- 
sical act  of  destroying  the  bench. 


CHANGE  IN  THEORY  OF  BANKRUPTCY 

But  the  similarity  between  old  customs  and  modern 
laws,  it  must  be  confessed,  ends  there.  In  the  first  place 
we  try  to  distinguish  between  fraudulent  bankruptcies 
and  honest  misfortunes.  To  those  in  the  latter  predica- 
ment, modern  bankruptcy  acts  are  of  just  as  much  relief 
as  they  are  to  creditors  generally.  Indeed  the  purposes 
of  the  present  bankruptcy  act  may  be  summarized  as 
follows : 

First.     To  judicially  establish  the  insolvency  of  debtors. 

Second.  To  provide  means  for  collecting  the  debtor's' 
property. 

Third.     To  provide  for  the  equitable  distribution  of 


BANKRUPTCY,  INSOLVENCY,  ETC.    333 

this  property  to  creditors,  making  certain  allowances  to 
the  debtor  called  exemptions. 

Fourth.  To  provide  a  means  for  permitting  the  debtor 
to  retain  his  assets  as  a  going  concern,  if  the  creditors 
think  that  procedure  the  best  course  to  pursue  (composi- 
tions). 

Fifth.  If  the  debtor  has  not  been  guilty  of  fraud,  to 
discharge  him  from  further  liability  from  his  debts  and 
thus  free  him  from  the  constrictions  of  his  unbearable 
financial  burdens. 

Sixth.  To  provide  for  the  uniform  administration  of 
insolvent  estates,  by  furnishing  the  means  for  taking  such 
administration  out  of  the  hands  of  state  courts. 

Seventh.  Incidentally  to  provide  remedies  and  punish- 
ments to  insure  the  orderly  administration  of  estates  ac- 
cording to  the  true  intentions  of  the  law. 

VOLUNTARY  AND  INVOLUNTARY  BANKRUPTCY 

When  a  debtor's  assets  at  a  fair  valuation^  are  less 
than  his  liabilities  he  may  be  thrown  into  bankruptcy.  Or 
he,  himself,  may  seek  the  protection  of  bankruptcy  pro- 
ceedings. Thus  bankruptcy  is  of  two  kinds,  voluntary 
and  involuntary.  The  former  is  brought  about  by  the 
filing  of  a  petition  by  the  debtor  himself.  When  a  debtor 
finds  himself  involved  and  prefers  not  to  continue  sus- 

1  The  statute  now  reads :  "whenever  the  aggregate  of  his 
property,  exclusive  of  any  property  which  he  may  have  con- 
veyed, transferred,  concealed,  or  removed,  or  permitted  to  be 
concealed  or  removed,  with  intent  to  defraud  hinder  or  delay 
his  creditors,  shall  not,  at  a  fair  valuation,  be  sufficient  in 
amount  to  pay  his  debts."     (Clause  15  of  Sec.  I.) 


334  CREDITS  AND  COLLECTIONS 

taining  losses  and  is  unwilling  to  permit  special  advan- 
tages to  some  creditors,  he  may  file  a  petition,  accom- 
panied by  a  schedule  of  assets  and  liabilities.  The  peti- 
tion, the  form  of  which  is  prescribed,^  alleges  that  the 
petitioner  "owes  debts,  which  he  is  unable  to  pay  in  full ; 
that  he  is  willing  to  surrender  all  his  properties  for  the 
benefit  of  his  creditors,  except  such  as  is  exempt  from 
law,"  and  expresses  a  desire  "to  obtain  the  benefits  of  the 
acts  of  Congress  relating  to  bankruptcy,"^ 

In  this  manner  he  seeks,  first,  to  have  his  assets  equally 
distributed  among  all  his  creditors,  and  second,  to  free 
himself,  of  his  debts,  thus  enabling  him,  unencumbered, 
to  begin  his  business  life  anew. 

Involuntary  bankruptcy  is  effected  by  the  filing  of  a 
petition^  by  creditors  against  an  insolvent  debtor,  who 
has  committed  an  act  of  bankruptcy,  within  four 
months  after  the  commission  of  such  act.  This  peti- 
tion may  be  filed  by  three  or  more  creditors  who  have 
provable  claims  aggregating  at  least  five  hundred  dol- 
lars ;  or  by  one  creditor  having  a  claim   for  such  an 

1  U.  S.  Supreme  Court,  Bankruptcy  Form,  No.  i. 

2  Annexed  to  the  petition  is  one  schedule  verified  by  the 
petitioner,  which  contains  "a  full  and  true  statement  of  all 
his  debts,  and  (so  far  as  it  is  possible  to  ascertain)  the  names 
and  places  of  residence  of  his  creditors,"  and  a  second 
schedule,  also  verified  by  the  petitioner's  oath,  that  "contains 
an  accurate  inventory  of  all  his  property,  both  real  and 
personal,  and  such  further  statements  concerning  such 
property  as  are  required  by  the  provisions  of  said  (bank- 
ruptcy) acts."  In  the  case  of  involuntary  bankruptcy,  these 
schedules  must  be  filed  by  the  bankrupt,  ten  days  after 
adjudication. 

3  U.  S.  Supreme  Court,  Bankruptcy  Form,  No.  3. 


BANKRUPTCY,  INSOLVENCY,  ETC.  335 

amount,  provided  all  the  creditors,  excluding  em- 
ployees and  near  relatives,  are  less  than  twelve  in  num- 
ber. The  petition  must  allege  these  facts  and  state  that 
the  debtor  owes  at  least  a  total  of  $1,000. 

Proceedings  which  are  technically  involuntary  are 
sometimes  practically  voluntary.  Thus  a  debtor  ac- 
quaints several  of  his  large  creditors  with  his  condi- 
tion. His  figures  show  that  he  cannot  continue  even 
if  an  extension  were  granted;  it  is  quite  clearly  seen 
that  the  number  of  his  creditors  is  so  great  that  a  com- 
mon law  settlement  is  quite  out  of  the  question.  To 
protect  the  creditors'  interests,  they  may  advise  the 
debtor  to  file  a  voluntary  petition.  But  this  debtor 
may  have  a  special  aversion  to  filing  a  voluntary  peti- 
tion, and  so  with  his  full  knowledge  and  consent,  his 
creditors  file  what  is  technically  an  involuntary  peti- 
tion. On  the  other  hand,  an  involuntary  petition  may 
be  filed  by  creditors  who  are  not  kindly  disposed  to- 
ward the  debtor  and  who  feel  it  is  to  their  interest  to 
take  his  business  from  him. 

Now  and  then  the  filing  of  a  petition  is  brought 
about  by  the  acts  of  unscrupulous  attorneys.  Thus, 
a  small  debtor  who  finds  himself  insolvent  may  consult 
an  unprincipled  attorney  whose  first  thought  is  neither 
of  the  debtor  nor  of  the  creditors,  but  only  of  himself 
and  the  prospects  for  large  fees.  Such  an  attorney 
obtains  a  list  of  creditors,  not  with  the  honest  intention 
of  arranging  for  a  settlement,  but  merely  to  ascertain 
which  of  the  creditors  can  be  influenced  to  file  a  peti- 
tion. These  facts  are  then  conveyed  to  a  confederate, 
another  attorney  of  the  same  despicable  type,  who 
procures  the  signatures  of  three  tractable  creditors  to 


336         CREDITS  AND  COLLECTIONS 

a  petition  and  nominally  acts  as  their  attorney.  He 
then  makes  every  effort  to  induce  a  majority  of  the 
creditors  to  permit  him  to  be  their  representative  in 
the  meeting  called  to  elect  the  trustee.  If  the  con- 
federate succeeds  in  electing  his  nominee  he  then  pro- 
cures an  order  authorizing  him  to  act  as  the  trustee's 
attorney.  Now  the  whole  situation  is  in  hand,  the 
case  is  all  "sewed  up."  One  scamp  represents  the 
debtor  and  the  other  represents  the  trustee;  between 
them  they  control  the  subsequent  handling  of  the 
estate. 

The  fees  and  expenses  coming  out  of  the  assets  of 
the  estate  are  shared  by  the  unscrupulous  attorneys. 
But  these  collusive  situations  are  susceptible  to  more 
serious  abuses.  It  is  hardly  to  be  expected  that  an 
estate  so  controlled  will  be  managed  with  a  zeal  for 
economy.  Nor  can  it  be  expected  that  under  the  cir- 
cumstances described  the  attorney  for  the  creditors 
will  expose  and  denounce  the  client  of  his  accomplice 
if  he  discovers  concealed  assets,  fraud,  or  material 
irregularities.  An  honorable  debtor  who  falls  into  the 
clutches  of  such  rascals  suffers  with  his  creditors,  for 
no  effort  will  be  made,  in  good  faith,  to  effect  a  settle- 
ment ;  the  estate  will  yield  these  attorneys  greater  reve- 
nue  than  the  poor  small  debtor  can  afford  to  pay  and 
the  fees  are  bigger  if  the  case  is  carried  through  to 
final  liquidation.  The  usual  result  is  a  very  lean  divi- 
dend for  the  creditors  and  a  blackened  record  for  the 
debtor. 

Honest  debtors  can  discharge  their  first  obligation 
to  their  creditors  by  consulting  reputable  attorneys 
only.     Creditors,  on  the  other  hand,  should  refuse  to 


BANKRUPTCY,  INSOLVENCY,  ETC.  337, 

give  the  representation  of  their  claims  to  any  attorney 
soliciting  them  unless  they  know  him  to  be  of  unim- 
peachable integrity.  Fortunately  the  vigilance  of  the 
legal  profession  and  of  the  credit  men's  associations 
has  succeeded  in  reducing  the  evils  growing  out  of 
unprincipled  practices  by  legal  birds  of  prey. 

WHO  MAY  BECOME  BANKRUPTS 

Voluntary  bankruptcy  is  open  to  all  individuals, 
firms  and  corporations,  except  banking,  insurance,  rail- 
way and  municipal  corporations.  No  special  amount 
of  indebtedness  is  required ;  a  person  owing  one  dollar 
or  several  millions  may  file  a  petition  in  voluntary 
bankruptcy. 

Any  insolvent  person,  except  "wage  earners"  whose 
compensation  is  less  than  $1,500  a  year  or  "farmers" 
or  "tillers  of  the  soil,"  and  any  firm  or  corporation, 
except  banking,  insurance,  railway  and  municipal  cor- 
porations, owing  $1,000  or  more  and  committing  an 
act  of  bankruptcy  may  be  put  into  involuntary  bank- 
ruptcy. 

FIVE  ACTS  OF  BANKRUPTCY 

As  indicated  above  voluntary  bankruptcy  is  begun 
by  the  filing  of  a  petition  by  the  debtor  and  need  not  be 
based  on  any  act  of  bankruptcy.  But  before  a  court 
can  adjudicate  an  insolvent  debtor  bankrupt  without 
his  own  consent,  and  take  charge  of  his  property  for 
the  protection  of  all  creditors,  the  debtor  must  commit 
an  act  of  bankruptcy  within  four  months  of  the  filing 
of  a  petition  by  the  creditors.     The  mere  insolvency. 


338         CREDITS  AND  COLLECTIONS 

no  matter  how  serious,  of  the  debtor,  does  not  give 
creditors  the  right  to  have  him  adjudicated  a  bank- 
rupt. He  first  must  have  committed  one  of  the  follow- 
ing five  acts  of  bankruptcy,  having: 

First.  Conveyed,  transferred,  concealed,  or  re- 
moved, or  permitted  to  be  concealed  or  removed,  any 
part  of  his  property,  with  intent  to  hinder,  delay,  or 
defraud  his  creditors,  or  any  of  them;  or 

Second.  Transferred,  while  insolvent,  any  portion 
of  his  property  to  one  or  more  of  his  creditors  with 
intent  to  prefer  such  creditors  over  his  other  creditors. 
The  transfer  must  result  in  diminishing  the  insolvent 
estate.  Thus  the  payment  while  insolvent  of  a  pre- 
existing debt  will  suffice,  but  the  payment  of  a  debt 
which  arose  simultaneously  with  or  after  payment 
would  not  amount  to  a  preference,  as  it  does  not  dimin- 
ish the  insolvent  estate.  For  example,  the  purchase 
of  merchandise  on  "C.O.D."  or  "C.B.D."  terms  will 
not  result  in  a  preference,  or  diminution  of  the  in- 
solvent's estate,  but  merely  in  the  substitution  of  one 
asset  (merchandise)  for  another  asset  (cash). 

Third.  Suffered  or  permitted,  while  insolvent,  any 
creditor  to  obtain  a  preference  through  legal  proceed- 
ings, and  not  having  at  least  five  days  before  a  sale 
or  final  disposition  of  any  property  affected  by  such 
preference,  vacated  or  discharged  such  preference. 
This  would  result  in  depleting  the  insolvent's  estate, 
to  the  benefit  of  one  creditor  and  to  the  detriment  of 
all  others. 

Fourth.  Made  a  general  assignment  for  the  benefit 
of  his  creditors,  or,  being  insolvent,  applied  for  a  re- 
ceiver or  trustee  for  his  property,  or,  because  of  in- 


BANKRUPTCY,  INSOLVENCY,  ETC.    339 

solvency,  a  receiver  or  trustee  having  been  put  in  charge 
of  his  property  under  laws  of  a  State,  of  a  Territory,  or 
of  the  United  States. 

This  act  of  bankruptcy  deserves  some  explanation.  To 
most  readers,  the  ordinary  methods  of  collecting  debts 
by  legal  process  are  familiar.  The  creditor  sues,  brings 
prepondering  evidence  of  the  debt,  gets  judgment,  issues 
execution  to  the  sheriff  or  marshall  who  seizes  the  goods 
of  the  debtor  to  satisfy  the  judgment  and  costs.  Some- 
times the  goods  are  seized  or  attached  at  the  outset  of 
the  action.  The  result  of  such  procedure,  where  a  debtor 
is  insolvent  is  to  make  the  insolvency  more  pronounced, 
since  not  only  are  the  debts  increased  by  court  and  other 
costs,  but  the  assets  are  diminished  in  value  by  piecemeal 
forced  sales.  It  was  customary,  therefore,  for  debtors 
to  protect  the  interests  of  all  their  creditors  from  the 
eagerness  of  some  of  their  creditors  by  putting  their 
property  beyond  the  reach  of  any  individual  creditor. 
One  means  was  the  general  assignment,  by  which  method 
an  instrument  was  executed  turning  over  all  the  debtor's 
property  to  some  creditor  in  trust  for  all  creditors.  An- 
other method  was  to  have  the  property  taken  into  custody 
by  a  court  through  a  receiver — "the  right  arm  of  the 
court."  Now  the  practical  effect  of  both  these  practices, 
if  permitted  would  be  to  put  the  property  beyond  the 
reach  of  the  bankruptcy  court,  and  the  law  therefore 
wisely  provides,  that  if  either  of  these  acts  is  committed 
it  shall  constitute  an  act  of  bankruptcy — it  is  in  effect  a 
confession  of  insolvency  (see  fifth  act  of  bankruptcy  be- 
low) ;  the  decree  in  bankruptcy  sets  the  transaction  aside. 
Fifth.     Admitted  in  writing  his  inability  to  pay  his 


340         CREDITS  AND  COLLECTIONS 

debts  and  his  willingness  to  be  adjudged  a  bankrupt  on 
that  ground. 

Until  the  debtor,  while  insolvent,  commits  one  of  these 
acts,  the  creditors  may  not  place  him  in  bankruptcy. 
Sometimes,  in  order  to  create  one  of  these  acts  of  bank- 
ruptcy, one  creditor,  with  the  approval  of  others  who 
are  anxious  to  have  the  debtor  adjudicated  bankrupt  will 
bring  suit  for  a  claim,  obtain  judgment  and  levy  execu- 
tion against  the  debtor's  property.  Thus  the  third  act  of 
bankruptcy  will  be  committed  and  the  creditors  may  then 
file  their  petition. 

TRIAL 

After  the  petition  is  filed  in  involuntary  cases,  the 
debtor  may  appear  and  contend  either  that  he  is  solvent, 
that  he  has  commited  no  act  of  bankruptcy,  that  the 
court  has  no  jurisdiction  or  that  the  allegations  in  regard 
to  the  provable  claims  of  the  petitioning  creditors  are 
untrue.  In  this  event,  the  court  hears  the  evidence  on 
both  sides  and  either  dismisses  the  petition  or  signs  a 
decree  adjudicating  the  debtor  a  bankrupt.  Generally, 
however,  the  debtor  will  not  appear,  and  the  court  will 
sign  the  decree  upon  default. 

PROVISIONAL    REMEDIES 

In  order  to  protect  the  assets  of  the  debtor  against  the 
fraud,  incompetency  or  negligence  of  the  debtor,  so-called 
provisional  remedies  are  provided  by  the  bankruptcy  act. 
They  are  called  provisional,  since  immediately  after  ad- 
judication the  bankrupt  will  lose  title  to  his  property  and 


BANKRUPTCY,  INSOLVENCY,  ETC.  341 

it  will  be  taken  over  by  the  trustee  in  bankruptcy.  But 
the  filing  of  the  petition  gives  the  debtor  notice  of  this  im- 
pending danger  and  he  may  be  inclined  to  hide  his  prop- 
erty for  reestablishing  his  estate  after  he  has  gained  an 
unmerited  discharge ;  or  he  may  grow  careless  and  give 
the  property  less  attention  that  it  deserves.  Moreover, 
he  may  accompany  these  reprehensible  acts  by  fleeing  in 
order  to  avoid  the  scrutinizing  examination  to  which  his 
creditors  are  entitled.  From  the  credit  man's  standpoint 
the  most  important  question  to  be  determined  is,  is  the 
debtor  disposed  to  make  way  with  his  property,  to  treat 
it  carelessly  or  wastefully  or  to  impede  the  proper  admin- 
istration of  the  estate  for  the  benefit  of  creditors?  Should 
such  a  contingency  arise  the  proper  step  is  to  bring  the 
information  to  the  attorneys  for  the  petitioning  creditors 
who  will  promptly  apply  for  the  appropriate  remedy. 
Briefly  these  remedies  are  as  follows : 

First.  The  property  may  be  seized  pending  the  ad- 
judication of  the  petition. 

Second.  The  bankrupt  may  be  arrested  and  detained. 
This  remedy  of  course  is  predicated  upon  proof  of  the 
debtor's  intent  to  flee. 

Third.  A  receiver  in  bankruptcy  may  be  appointed  by 
the  bankruptcy  court.  This  remedy  is  quite  customarily 
sought  and  obtained.  Parenthetically  it  may  be  observed 
that  credit  men,  especially  those  who  have  familiarized 
themselves  with  the  bankruptcy  law  are  well  qualified  to 
act  as  receivers  on  acount  of  their  understanding  of  the 
debtor's  business.  Frequently  the  court  directs  the  re- 
ceiver to  continue  the  operation  of  the  business  as  the 
best  means  of  conserving  the  assets. 

Fourth.     The   debtor  may  be   enjoined   from   parting 


342  CREDITS  AND  COLLECTIONS 

with  his  property.  Should  the  debtor  thereafter  dispose 
of  his  property  he  may  be  imprisoned  for  contempt  of 
court. 

Fifth.  Creditors  may  commence  actions  for  the  re- 
covery of  any  assets  the  debtor  may  have  fraudulently 
transferred.  If,  thereafter,  the  debtor  is  adjudicated 
bankrupt,  the  trustee  will  continue  these  actions  for  the 
benefit  of  all  creditors,  and  if  the  goods  are  recovered  the 
creditors  who  began  the  actions  will  be  reimbursed  for 
the  expenses  they  sustained. 

REFERENCES 

When  the  Court  signs  a  decree  in  bankruptcy  it  refers 
the  case  to  a  referee,  who,  acting  as  a  court  of  bankruptcy, 
conducts  all  the  usual  future  proceedings  except  the  con- 
firmation of  a  proposed  composition  and  the  final  dis- 
charge of  the  bankrupt  from  further  liability  of  his  debts. 
It  is  with  the  referee  then  that  the  credit  man  will  have 
most  of  his  dealings.  Thus  the  examination  of  witnesses 
is  conducted  before  the  referee  and  all  meetings  of  cred- 
itors are  presided  over  by  him.  The  confirmation  of  a 
composition  which  may  be  proposed  or  the  final  discharge 
of  the  bankrupt  must  be  passed  on  by  the  Court  itself. 
Referees  are  appointed  by  the  judges  of  each  federal  dis- 
trict for  the  term  of  two  years.  At  least  one  referee  is 
required  for  each  county. 

MEETINGS    OF    CREDITORS 

The  referee  is  required  to  call  a  meeting  of  creditors 
of  the  bankrupt  not  less  than  ten  nor  more  than  thirty 
days  after  the  decree  of  bankruptcy  has  been  signed. 
Creditors  are  entitled  to  ten  davs'  notice  bv  mail  of  this 


BANKRUPTCY,  INSOLVENCY,  ETC.  343 

meeting.  Such  notice  must  be  published  at  least  once, 
not,  later  than  one  week  prior  to  the  meeting. 

The  purpose  of  this  first  meeting  is  to  organize  the  ad- 
ministration of  the  estate  and  if  possible  to  begin  the  col- 
lection of  assets  by  discovering  where  they  may  be  lo- 
cated. In  the  first  place,  therefore,  the  claims  of  cred- 
itors are  passed  upon  to  determine  who  actually  is  to 
be  interested  in  the  estate.  These  creditors  then  take  up 
the  election  of  a  trustee  and  may  examine  the  bankrupt. 

At  creditors'  meetings  the  credit  man  can  make  sug- 
gestions for  discovering  and  collecting  the  estate  as  well 
as  for  administering  it.  The  examination  of  witnesses  is 
not  limited.  Not  only  the  business  associates  of  the 
bankrupt  may  be  interrogated,  but  also  his  relations, 
friends,  and  acquaintances. 

Subsequent  meetings  of  creditors  are  held  from  time 
to  time  whenever  the  referee  feels  it  is  necessary  to 
carry  out  the  purposes  of  the  bankruptcy  proceedings. 
A  meeting  must  be  called  whenever  one- fourth  or  more 
in  number  of  those  who  have  proven  their  claims  file  a 
written  request  to  that  effect.  IMoreover,  a  final  meeting 
of  creditors  must  be  ordered  whenever  the  affairs  of  the 
estate  are  ready  to  be  closed. 

THE   TRUSTEE 

The  most  important  right  of  creditors  is  the  election 
of  a  trustee,  whose  duty  it  is  to  liquidate  the  assets  of 
the  bankrupt  and  distribute  the  proceeds  to  creditors 
as  provided  by  law.  The  election  is  held  at  the  first 
meeting  of  creditors.  A  majority  vote,  both  in  number 
of  creditors  and  amount  of  claims,  is  necessary  to  elect. 

The  election  of  the  trustee  is  subject  to  the  approval 


344         CREDITS  AND  COLLECTIONS 

of  the  referee  or  judge,  and  in  case  of  failure  of  cred- 
itors to  elect  a  trustee,  the  referee  or  judge  appoints 
one.  The  trustee  elected  by  the  majority  in  number 
and  amount  of  creditors  is  practically  always  approved, 
and  if  the  vote  on  the  per  dollar  basis  differs  from  that 
on  the  per  capita  basis,  the  choice  of  the  majority  in 
number  of  creditors  is  usually  appointed. 

The  trustee,  before  entering  upon  his  official  duties, 
is  required  to  file  a  bond,  the  amount  of  which  is  fixed 
by  the  vote  of  creditors  at  the  first  meeting.  The 
trustee  then  takes  title  to  all  the  bankrupt's  property, 
except  such  for  which  exemption  is  claimed  and  al- 
lowed. As  far  as  title  to  this  property  is  concerned, 
the  trustee  practically  stands  "in  the  shoes"  of  the 
bankrupt.  He  holds  the  property  subject  to  all  legal 
and  equitable  liens.  Thus  the  bankrupt's  wife's  right 
of  dower  is  undisturbed.  The  seller's  right  of  stop- 
page in  traiisitu  continues,  and  his  right  to  rescind  the 
sale  and  recover  the  goods  for  fraudulent  misrepre- 
sentations of  the  bankrupt  is  unimpaired.  The  trustee 
acquires  no  better  title  to  the  property  than  the  bank- 
rupt had. 

The  trustee  must  also  reduce  all  property  to  posses- 
sion, liquidate  it  under  the  direction  of  the  Court,  as 
expeditiously  as  is  compatible  with  the  best  interests 
of  all  parties  concerned,  and  distribute  the  proceeds  to 
creditors  as  required  by  law.  He  must  keep  account 
of  all  amounts  received  and  disbursed,  furnish  infor- 
mation concerning  the  condition  of  the  estate  as  re- 
quested by  parties  in  interest,  and  make  final  reports 
and  file  final  accounts  fifteen  days  before  the  day  fixed 
for  the  final  meeting  of  creditors.     This  meeting,  as 


BANKRUPTCY,  INSOLVENCY,  ETC.  345 

well  as  all  others,  should  be  attended  by  creditors. 
Above  all,  they  should  make  it  their  duty  to  be  present 
or  properly  represented  at  the  first  meeting  to  elect 
the  trustee,  for  the  election  of  a  good  business  man 
familiar  with  the  business  of  the  bankrupt  will  insure 
the  largest  possible  dividends. 


PROOF  AND  ALLOWANCE  OF  CLAIMS 

Before  a  creditor  may  participate  in  the  election  of 
a  trustee  or  in  the  distribution  of  the  assets  of  the 
bankrupt  estate,  he  must  file  a  proof  of  claim,  and  the 
claim  must  be  allowed  by  the  referee  or  court. 

A  claim  is  proved  by  filing  a  statement  under  oath, 
in  writing,  by  a  creditor  setting  forth  the  claim,  the 
consideration  therefor,  and  whether  any,  and,  if  so 
what,  payments  have  been  made  thereon  and  that  the 
sum  claimed  is  justly  owing  from  the  bankrupt  to  the 
creditor.^  The  form  of  claim  is  prescribed,  and  the 
official  blank  may  be  obtained  at  a  nominal  cost  from 
any  legal  stationer.  Whenever  a  claim  is  founded 
upon  an  instrument  of  writing,  such  instrument,  un- 
less lost  or  destroyed,  shall  be  filed  with  the  claim.  If 
the  instrument  is  lost  or  destroyed,  a  statement  of  such 
fact  and  of  the  circumstances  of  such  loss  or  destruc- 
tion must  be  filed  under  oath  with  the  claim. ^ 

1  Bankruptcy  Act  (1898),  Sec.  57  a.  U.  S.  Supreme  Court 
Bankruptcy,  G.  O.  No.  21,  par.  i. 

2  Bankruptcy  Act  (1898),  Sec.  57  b. 


346         CREDITS  AND  COLLECTIONS 

DEBTS   WHICH    MAY   BE   PROVED 

A  provable  debt,  in  general,  is  one  that  is  quite  certain 
to  be  collected,  such  as  debts  due  from  money  loaned, 
for  goods  sold,  for  breach  of  contract  and  the  like.  As 
long  as  the  debt  is  owing  at  the  time  the  petition  is  filed 
it  becomes  a  provable  debt,  though  it  may  not  be  payable 
till  thereafter.  Moreover  it  must  be  remembered  that  the 
entire  bankruptcy  proceedings  are  dated  back  to  the  time 
of  the  filing  of  the  petition.  The  date  of  bankruptcy  is 
the  date  not  of  the  signing  of  a  decree  but  of  the  filing 
of  the  petition.  Debts  therefore  must  be  owing  at  this 
time ;  and  it  is  only  such  debts  as  are  provable ;  and,  as  a 
corollary,  it  is  only  such  debts  as  are  dischargable  in  the 
bankruptcy  proceedings.  Debts  subsequently  incurred, 
even  those  incurred  before  the  decree  is  signed,  are  not 
included  in  the  bankruptcy  proceedings  and  cannot  be 
discharged. 

Unliquidated  claims  for  damages  arising  out  of  a  tort, 
such  as  assault  and  battery,  libel  and  slander,  trespass  and 
embezzlement,  are  not  provable.  But  if  the  tort  can  be 
waived  and  recovery  had  on  quasi-contract  for  unjust  en- 
richment, for  example,  where  there  has  been  conversion 
of  goods,  or  if  the  claim  for  tortious  injury  has  been  re- 
duced to  judgment  before  the  adjudication,  the  claim  may 
be  proved. 

Where  a  person  is  contingently  liable  to  pay  the  debt  of 
a  bankrupt  his  claim  may  be  proved  in  the  name  of  the 
creditor  to  whom  he  is  liable,  or  if  unknown,  in  his  own 
name,  providing  the  creditor  himself  fails  to  prove  the 
claim. 

Unliquidated  claims  of  a  contractual  nature,  which 
might   otherwise   be   provable,   may   be   liquidated   in   a 


BANKRUPTCY,  INSOLVENCY,  ETC.     347 

manner  directed  by  the  court  and  may  then  be  proved 
and  allowed  against  the  estate.  These  include  damages 
for  breach  of  contract,  but  not  claims  for  damages  for 
torts  which  had  not  been  reduced  to  judgment  before 
the  filing  of  the  petition. 

FILING  PROOF  OF  CLAIMS 

Claims  cannot  be  proved  against  a  bankrupt  estate 
subsequent  to  one  year  from  adjudication.  The  best 
practice  for  creditors  to  follow  is  to  file  their  claims 
with  the  referee  at  or  before  the  first  meeting  of  cred- 
itors. In  order  to  insure  the  receipt  of  the  proof  by 
the  referee,  registered  post  should  be  used  in  mailing 
a  claim. 

Filing  proof  of  claim  with  the  referee  is  sufficient 
to  insure  the  creditor  a  pro  rata  share  in  the  distribu- 
tion of  the  bankrupt's  estate  and  a  vote  at  the  election 
of  the  trustee.  No  advantage  can  ordinarily  be  gained 
by  giving  the  claim  to  an  attorney.  Certain  attorneys, 
offering  to  represent  the  creditor  without  any  fee, 
make  a  practice  of  soliciting  claims  against  an  estate. 
Such  attorneys  should  be  avoided,  for  they  can  obtain 
for  the  creditor  no  more  than  can  he  himself.  And 
eventually  these  attorneys  are  paid  from  some  source. 
Perhaps  by  holding  out  in  a  composition  settlement, 
they  may  obtain  something  additional  for  themselves 
from  the  debtor  as  an  inducement  (or  bribe)  to  con- 
sent to  the  composition. 

Where,  however,  a  representative  committee  of 
creditors  or  an  active  adjustment  bureau  solicits  the 
creditor's  claim,  he  should  file  it  with  the  referee,  and, 


348         CREDITS  AND  COLLECTIONS 

under  most  circumstances,  willingly  give  the  committee 
or  bureau  a  proxy  to  vote  at  meetings.  He  will  usu- 
ally find  that  this  course  insures  the  election  of  a  more 
competent  trustee  and  a  more  businesslike  administra- 
tion of  the  bankrupt's  estate. 

ALLOWABLE  CLAIMS 

Before  a  claim  may  be  allowed  by  the  court,  it  must 
be  one  which  is  provable,  and  it  must  be  filed  or  proved 
in  the  proper  form.  However,  some  provable  claims 
may  not  be  allowed,  or  may  not  be  allowed  in  full  on 
account  of  errors,  counterclaims,  securities  held,  pref- 
erences or  many  other  objections.  Thus,  secured 
claims  are  allowed  only  to  the  extent  of  the  differ- 
ence between  the  amount  of  the  claim  and  the  value 
of  the  bankrupt's  property  securing  the  claim.  And, 
too,  claims  of  creditors  retaining  voidable  preferences 
are  not  allowed  until  the  preference  held  is  surrendered 
by  the  creditor. 

VOIDABLE  PREFERENCES 

A  debtor  is  deemed  to  have  given  a  preference  if, 
being  insolvent,  he  has  procured  or  permitted  a  judg- 
ment to  be  entered  against  himself  in  favor  of  any  per- 
son, or  made  any  transfer  of  his  property,  and  the 
effect  of  the  enforcement  of  the  judgment  or  transfer 
will  be  to  enable  any  one  of  his  creditors  to  obtain  a 
greater  percentage  of  his  debt  than  any  other  of  such 
creditors  of  the  same  class.  A  preference  is  created 
regardless  of  the  debtor's  intent,  provided  that  at  the 
time  of  giving  it  the  debtor  was  insolvent. 


BANKRUPTCY,  INSOLVENCY,  ETC.  349 

Under  the  Bankruptcy  Act,  a  preference  is  voidable 
if  (i)  given  within  four  months  of  the  fiHng  of  the 
petition  or  after  fiHng  the  petition  and  before  the  ad- 
judication, (2)  for  a  pre-existing  debt  and  (3)  if  the 
person  receiving  it  or  benefiting  thereby,  or  his  agent 
acting  therein,  at  the  time  of  receiving  the  preference 
had  reasonable  cause  to  believe  that  the  debtor  intended 
thereby  to  give  a  preference.  The  trustee  may  avoid 
such  a  preference  and  recover  the  property  or  its  value 
from  the  recipient  for  the  benefit  of  the  bankrupt  es- 
tate. Moreover,  the  creditor  receiving  the  preference 
must  surrender  the  preference  in  order  to  participate 
in  any  further  distribution  of  the  debtor's  estate. 

But,  if  a  creditor  has  been  preferred,  and  afterwards, 
in  good  faith,  gives  the  debtor  further  credit  without 
security  of  any  kind  for  property  which  becomes  a  part 
of  the  debtor's  estate,  the  amount  of  such  new  credit 
remaining  unpaid  at  the  time  of  the  adjudication  in 
bankruptcv  may  be  set  off  against  the  amount  which 
would  otherwise  be  recoverable  from  him. 

PRIORITY  OF  PAYMENT  OF  DEBTS 

Before  any  dividends  may  be  paid  to  general  cred- 
itors, the  Bankruptcy  Act  provides  for  the  payment  in 
full  of  certain  other  debts.  Thus,  the  debts  of  a  bank- 
rupt are  paid  by  the  trustee  in  the  following  order : 

(i)  All  taxes  legally  due  and  owing  by  the  bank- 
rupt to  the  United  States,  state,  county,  district  or 
municipality. 

(2)  The  actual  and  necessary  cost  of  preserving  the 
estate  subsequent  to  filing  the  petition ; 


350         CREDITS  AND  COLLECTIONS 

(3)  The  filing  fees  paid  by  creditors  in  involuntary 
cases;  and,  where  property  of  the  bankrupt  transferred 
or  concealed  by  him,  either  before  or  after  the  filing 
of  the  petition,  shall  have  been  recovered  for  the  bene- 
fit of  the  estate  of  the  bankrupt  by  the  efiforts  and  at 
the  expense  of  one  or  more  creditors,  the  reasonable 
expenses  of  such  recovery; 

(4)  The  cost  of  administration,  including  the  fees 
and  mileage  payable  to  witnesses  as  now  or  hereafter 
provided  by  the  laws  of  the  United  States,  and  one 
attorney's  reasonable  fee,  for  the  professional  services 
actually  rendered,  irrespective  of  the  number  of  attor- 
neys employed,  to  the  petitioning  creditors  in  involun- 
tary cases,  to  the  bankrupt  in  involuntary  cases,  while 
performing  the  duties  herein  prescribed,  and  to  the 
bankrupt  in  voluntary  cases,  as  the  court  may  allow. 

(5)  Wages  due  to  workmen,  clerks,  traveling  or 
city  salesmen,  or  servants  of  a  bankrupt,  which  have 
been  earned  within  three  months  before  the  date  of 
the  commencement  of  proceedings,  not  to  exceed  three 
hundred  dollars  to  each  claimant ;  and 

(6)  Debts  owing  to  any  person  who  by  the  laws  of 
the  States  or  the  United  States  is  entitled  to  priority.^ 

DIVIDENDS  IN  BANKRUPTCY 

Whatever  remains  after  the  above  claims  have  been 
paid  in  full  is  distributed  pro  rata  among  all  other 
creditors.  The  referee  must  declare  dividends  and 
prepare  dividend  sheets  showing  dividends  declared 

1  Bankruptcy  Act  (1898),  Sec.  64  b. 


BANKRUPTCY,  INSOLVENCY,  ETC.  351 

and  to  whom  payable.^  It  is  the  duty  of  the  trustee 
to  pay  the  dividends  within  ten  days  after  they  are 
declared  by  the  referee. - 

The  first  dividend  must  be  declared  within  thirty 
days  after  the  adjudication,  if  the  money  of  the  estate 
in  excess  of  the  amount  necessary  to  pay  the  debts 
which  have  priority  and  such  claims  as  have  not  been, 
but  probably  will  be,  allowed,  equals  five  per  centum 
or  more  of  such  allowed  claims.  Dividends  subsequent 
to  the  first  may  be  declared  oftener  and  in  smaller  pro- 
portions if  the  judge  so  orders,  provided,  however, 
that  the  first  dividend  must  not  include  more  than  fifty 
per  centum  of  the  money  of  the  estate  in  excess  of 
the  amount  necessary  to  pay  the  debts  which  have 
priority  and  such  claims  as  probably  will  be  allowed; 
and  provided  further,  that  the  final  dividend  is  not  de- 
clared within  three  months  after  the  first  dividend  is 
declared.^ 

COMPOSITIONS  IN  BANKRUPTCY 

Instead  of  allowing-  the  estate  to  be  distributed  in 
the  above  manner,  the  debtor  may,  either  before  or 
after  adjudication,  offer  to  settle  with  his  creditors  at 
a  certain  per  cent  of  their  claims,  and,  if  the  offer  is 
accepted  and  approved,  remove  his  estate  from  bank- 
ruptcy freed  from  all  claims  of  creditors.  This  is 
known  as  a  composition  in  bankruptcy.  Before  a  com- 
position will  be  approved  by  the  court,  the  debtor  must 

1  Bankruptcy  Act  (1898),  Sec.  39  a. 

2  Bankruptcy  Act  (1898),  Sec.  47  a. 

3  Bankruptcy  Act  (1898),  Sec.  65  b. 


352         CREDITS  AND  COLLECTIONS 

be  examined  in  open  court  or  at  a  meeting  of  his  cred- 
itors and  must  file  the  Hst  of  creditors  required  to 
be  filed  by  bankrupts.^  The  debtor's  offer  of  composi- 
tion before  it  can  be  approved  by  the  court  must  be 
accepted  in  writing  by  a  majority  in  number  of  all 
creditors  whose  claims  have  been  allowed,  which  num- 
ber must  represent  a  majority  in  amount  of  such 
claims.  Moreover,  the  consideration  to  be  paid  by  the 
bankrupt  to  his  creditors,  and  the  money  necessary  to 
pay  all  debts  which  have  priority,  including  the  costs 
of  the  proceedings,  must  have  been  deposited  in  such 
place  as  the  court  designates.^ 

Thereafter  the  judge  confirms  the  composition,  pro- 
viding he  is  satisfied  that  ( i )  it  is  for  the  best  inter- 
ests of  the  creditors,  (2)  the  bankrupt  has  not  been 
guilty  of  fraud  such  as  concealing  assets,  (3)  the  bank- 
rupt has  not  been  previously  discharged  in  voluntary 
bankruptcy  within  six  years  and  (4)  the  composition 
is  offered  and  accepted  in  good  faith,  and  not  made  or 
procured  by  any  means  forbidden  by  the  Act,  such  as 
secretly  giving  one  creditor  more  than  others.  Even 
after  the  composition  is  confirmed  by  the  court,  it  may 
be  set  aside  at  any  time  within  six  months  thereafter 
on  the  ground  of  fraud. 

During  the  hearing  preceding  the  confirmation  of  a 
composition  by  the  court,  any  creditor  may  oppose  the 
composition  by  filing  with  the  court  written  objections 
setting  forth  the  grounds  for  opposing  the  composi- 
tion. If  the  judge  is  satisfied  that  these  grounds  are 
adequate,  even  if  the  requisite  number  of  creditors 

^  Bankruptcy  Act  (1898),  Sec.  12  a. 

'  Bankruptcy  Act,  Sec.  12  b. 


BANKRUPTCY,  INSOLVENCY,  ETC.  353 

consent  to  the  composition,  he  may  refuse  to  approve 
the  settlement.  The  estate  would  then  be  administered 
in  bankruptcy  as  provided  above. 

When,  however,  the  composition  is  confirmed,  the 
Court  appoints  a  distributing  agent,  usually  the  referee 
or  trustee,  who  disburses  the  composition  fund  and 
makes  a  report  to  the  court.  The  Court  then  dismisses 
the  case  and  the  debtor  is  discharged  from  all  his  debts, 
except  those  agreed  to  be  paid  by  the  terms  of  the  com- 
position and  those  not  affected  by  a  discharge.^ 

DISCHARGE  OF  THE  BANKRUPT 

One  of  the  objects  of  the  bankruptcy  laws,  as  was 
stated  at  the  outset  of  this  chapter,  is  to  enable  the 
creditors  to  take  over  the  assets  of  an  insolvent  debtor 
and  ratably  distribute  the  assets  among  themselves, 
thus  preventing  preferences.  How  this  is  accomplished 
has  been  indicated  above.  The  second  object  of  the 
law  is  to  release  the  debtor  from  his  liabilities  remain- 
ing unpaid  after  his  assets  have  been  taken  by  his  cred- 
itors. This  is  accomplished  through  discharge  in  bank- 
ruptcy. Any  person  may,  after  the  expiration  of  one 
month  and  within  the  next  twelve  months  subsequent 
to  being  adjudged  a  bankrupt,  file  an  application  for 
a  discharge  in  the  court  of  bankruptcy  in  which  the 
proceedings  are  pending;  but  if  it  appears  to  the  judge 
that  the  bankrupt  was  unavoidably  prevented  from 
filing  it  within  such  time,  it  may  be  filed  within,  but 
not  after,  the  expiration  of  the  next  six  months.^ 

1  See  page  355,  post. 

2  Bankruptcy  Act  (1898),  Sec.  14  a. 


354         CREDITS  AND  COLLECTIONS 

The  Court  will  then  discharge  the  bankrupt  from  his 
liabilities  (except  those  mentioned  below)  unless  the 
bankrupt  has  committed  one  of  the  following  acts  ex- 
pressly prohibited  by  the  Bankruptcy  Act :  ( i )  Com- 
mitted an  offense  punishable  by  imprisonment  as  pro- 
vided by  the  Bankruptcy  Act  ;^ 

(2)  With  intent  to  conceal  his  financial  condition, 
destroyed,  concealed,  or  failed  to  keep  books  of  ac- 
count or  records  from  which  such  condition  might  be 
ascertained ;  or 

(3)  Obtained  money  or  property  on  credit  upon  a 
materially  false  statement  in  writing,  made  by  him  to 
any  person  or  his  representative  for  the  purpose  of 
obtaining  credit  from  such  person ;  or 

(4)  At  any  time  subsequent  to  the  first  day  of  the 
four  months  immediately  preceding  the  filing  of  the 
petition,  transferred,  removed,  destroyed,  or  concealed, 

^  Sec.  29  b  of  the  Bankruptcy  Act  (1898)  provides: 
A  person  shall  be  punished,  by  imprisonment  for  a  period 
not  to  exceed  two  years,  upon  conviction  of  the  offense  of 
having  knowingly  and  fraudulently  (i)  concealed  while  a 
bankrupt,  or  after  his  discharge,  from  his  trustee  any  of  the 
property  belonging  to  his  estate  in  bankruptcy;  or  (2)  made 
a  false  oath  or  account  in,  or  in  relation  to,  any  proceeding 
in  bankruptcy;  (3)  presented  under  oath  any  false  claim  for 
proof  against  the  estate  of  a  bankrupt,  or  used  any  such  claim 
in  composition  personally  or  by  agent,  proxy,  or  attorney,  or 
as  agent,  proxy  or  attorney;  or  (4)  received  any  material 
amount  of  property  from  a  bankrupt  after  the  filing  of  a  peti- 
tion, with  intent  to  defeat  this  act;  or  (5)  extorted  or  at- 
tempted to  extort  any  money  or  property  from  any  person 
as  a  consideration  for  acting  or  forbearing  to  act  in  bank- 
ruptcy proceedings. 


BANKRUPTCY,  INSOLVENCY,  ETC.  355 

or  permitted  to  be  removed,  destroyed  or  concealed, 
any  of  his  property,  with  intent  to  hinder,  delay,  or  de- 
fraud his  creditors ;  or 

(5)  In  voluntary  proceedings  been  granted  a  dis- 
charge in  bankruptcy  within  six  years ;  or 

(6)  In  the  course  of  the  proceedings  in  bankruptcy 
refused  to  obey  any  lawful  order  of,  or  to  answer  any 
material  question  approved  by  the  court.^ 

DEBTS  NOT  DISCHARGED 

In  general  all  provable  debts,  incurred  before  the 
petition  was  filed,  are  discharged  by  discharge  in  bank- 
ruptcy. The  following  debts,  however,  are  not  af- 
fected, but  remain  a  claim  against  the  bankrupt  even 
after  his  discharge  in  bankruptcy. 

( 1 )  Taxes  levied  by  the  United  States,  the  state, 
county,  district,  or  municipality  in  which  he  resides; 

(2)  Liabilities  for  obtaining  property  by  false  pre- 
tenses or  false  representations,  or  wilful  and  malicious 
injuries  to  the  person  or  property  of  another;  or  for 
alimony  due  or  to  become  due,  or  for  maintenance  or 
support  of  wife  or  child,  or  for  seduction  of  an  un- 
married female,  or  for  breach  of  promise  of  marriage 
accompanied  by  seduction  or  for  criminal  conversa- 
tion; 

(3)  Debts  not  duly  scheduled  in  time  for  proof  and 
allowance,  with  the  name  of  the  creditor  if  known  to 
the  bankrupt,  unless  such  creditor  had  notice  or  actual 
knowledge  of  the  proceedings  in  bankruptcy ;  or 

(4)  Debts  created  by  his  fraud,  embezzlement,  mis- 
1  Bankruptcy  Act  (1898),  Sec.  14  b. 


356         CREDITS  AND  COLLECTIONS 

appropriation,  or  defalcation  while  acting  as  an  officer 
or  in  any  fiduciary  capacity.  ^ 

(5)   Debts  incurred  after  the  petition  has  been  filed. 

If  a  creditor  can  classify  his  debt  among  any  of  the 
above  groups  he  may  proceed  to  enforce  the  collection 
of  the  debt  as  though  no  bankruptcy  proceedings  had 
taken  place. 

WHY    SOME   FAILING   BUSINESSES  DO    NOT   GO 
INTO    BANKRUPTCY 

The  question  frequently  arises  why  certain  concerns 
are  liquidated  on  account  of  lack  of  success  and  still  do 
do  not  get  into  the  bankruptcy  courts.  In  the  first  place 
it  must  be  remembered  that  certain  concerns — banks  and 
railroads  for  example — cannot  be  put  into  bankruptcy 
and  cannot  petition  themselves  into  bankruptcy.  In  the 
next  place  a  concern  may  be  insolvent  in  the  sense  that 
it  cannot  meet  its  debts  in  the  ordinary  course  of  business, 
and  still  not  be  insolvent  as  the  word  insolvency  is  defined 
in  the  bankruptcy  act,  via,  an  excess  of  liabilities  over 
assets.  Such  a  concern,  for  example,  would  be  one  that  is 
"land  poor" — one  that  has  plenty  of  fixed  capital  but 
little  ready  cash  to  meet  maturing  debts.  The  procedure 
in  such  a  case  ordinarily  is  to  appoint  a  receiver  to 
prevent  precipitate  sale  of  valuable  assets.  A  re- 
ceiver is  an  impartial  person  appointed  by  a  court  of 
equity  to  hold  property  for  the  benefit  of  litigants 
pending  a  proper  determination  of  the  ultimate  disposi- 
tion of  the  property.  The  receiver  takes  his  orders  from 
the  court  and  holds,  guards  and  if  directed  operates  the 

^Bankruptcy  Act   (1898),  Sec.   17a. 


BANKRUPTCY,  INSOLVENCY,  ETC.    357 

property  until  by  agreement  or  a  decree  of  the  court  it  is 
decided  what  is  to  be  done  with  it  to  satisfy  all  claimants. 
Usually,  especially  in  the  case  of  large  corporations,  the 
claims  of  the  various  parties  in  interest  are  worked  out 
in  a  "reorganization"  by  a  reorganization  committee.  The 
work  of  reorganization  furnishes  a  topic  beyond  the  scope 
of  this  book.  Finally  concerns  may  be  wound  up  amicably 
by  the  unanimous  consent  of  the  creditors  and  owners 
who  desire  to  avoid  all  fees — even  the  well-regulated  fees 
of  the  bankruptcy  courts. 


CHAPTER  XVIII 
CREDIT  SAFEGUARDS 

GUARANTEES 

One  method  of  securing  the  payment  of  an  account, 
where  the  credit  of  a  prospective  customer  is  limited 
or  doubtful,  is  by  having  the  customer  procure  the 
guarantee  of  some  responsible  party.  Under  the  Stat- 
ute of  Frauds  a  promise  to  answer  for  the  debt,  default 
or  miscarriage  of  another,  to  be  binding  must  be  in 
writing.  A  guaranty  of  another's  account  should  com- 
ply with  this  provision. 

Guarantees  may  be  of  several  kinds.  A  general 
guarantee  is  one  addressed  to  the  public,  while  a  special 
guaranty  is  for  the  benefit  of  only  one  creditor.  The 
guarantee  may  be  limited  to  a  definite  amount  or  it 
may  be  unlimited.  It  may  further  be  for  a  definite 
length  of  time  or  may  be  continuous  until  revoked. 
Unless  it  appears  to  be  the  latter,  it  will  be  construed  to 
be  only  for  the  present  time. 

When  the  contract  of  sale  is  entered  into  at  the  same 
time  as  or  subsequent  to  the  contract  of  guaranty,  no 
special  consideration  is  necessary  to  support  the  latter 
contract.  Where,  however,  the  contract  of  guaranty 
is  made  subsequent  to  the  contract  of  sale,  a  new  con- 
sideration moving  from  the  creditor  is  necessary  to 
make  the  guaranty  binding. 

358 


CREDIT  SAFEGUARDS  359 

Any  special  agreement  altering  the  original  terms 
of  sale  entered  into  by  the  debtor  and  creditor  without 
the  guarantor's  consent  will  discharge  the  guarantor 
from  all  liability.  Therefore,  before  granting  any 
binding  extension  of  time  to  a  guaranteed  account,  a 
creditor  should  obtain  the  consent  of  the  guarantor. 

A  useful  form  of  guaranty  is  that  recommended  by 
the  National  Association  of  Credit  Men.  It  will  be 
noticed  that  it  is  a  special,  limited  and  continuous  guar- 
anty. The  guarantor  has  the  right  to  terminate  the 
guaranty  by  giving  written  notice  to  the  seller.  This 
notice,  however,  will  not  affect  the  part  of  the  guaranty 
already  acted  upon.  A  very  valuable  provision  is  that 
which  permits  a  change  in  the  original  terms  of  sale 
between  the  vendor  and  the  purchaser,  so  that  an  ex- 
tension may  be  granted  without  impairing  the  guar- 
anty. 

FORM  OF  GUARANTY 

The  Undersigned,  for  and  in  consideration  of  one 

dollar  ($1.00)  in  hand  paid  by 

of hereinafter  called  the 

Purchaser,  the  receipt  whereof  is  hereby  acknowledged, 
and  the  further  consideration  of  enabling  the  said  Pur- 
chaser to  buy  goods,  wares,  and  merchandise  on  credit 

of 

hereinafter  called  the  Vendor,  hereby  jointly  and 
severally,  whether  signed  by  more  than  one  person 
or  not,  guarantee  the  payment  of,  and  bind  ourselves 
personally,  our  heirs,  executors,  and  administrators  to 
said  Vendor,  for  the  payment  of  all  debts  of  every 
kind,  name,  and  nature,  including  interest,  which  the 
said  Purchaser  is  now  owing,  or  may  hereafter  owe, 


36o         CREDITS  AND  COLLECTIONS 

the  said  Vendor,  whether  due  or  not  due,  provided, 
however,  that  the  HabiHty  of  the  undersigned  here- 
under shall  not  be  for  a  greater  amount  than 

Dollars  ($ )  and  interest. 

The  undersigned  agree  that  the  debts,  payment  of 
which  is  hereby  guaranteed,  may,  by  note  or  other- 
wise, be  changed  in  form,  extended,  or  renewed,  at 
the  option  of  said  Vendor  without  notice  to  the  under- 
signed, and  the  liability  of  the  undersigned  shall  not  be 
affected  by  such  change,  extension  or  renewal;  that 
this  guaranty  shall  remain  in  full  force  and  effect  up 
to  such  date  as  the  said  Vendor  shall  have  received 

at  its  office  in 

written  notice  from  the  undersigned  to  cease  selling 
the  said  Purchaser  on  the  strength  of  his  guaranty; 
that  the  Vendor  may  at  its  option  extend  credit  to  the 
Purchaser  to  an  amount  in  excess  of  the  limit  to  this 
guaranty  without  impairing  our  joint  and  several  lia- 
bilities hereunder;  that  should  said  Vendor  commence 
suit  against  the  Purchaser,  or  against  the  undersigned 
on  this  guaranty,  to  pay  a  reasonable  attorney  fee,  and 
that  the  same  may  be  taxed  against  the  undersigned  as 
part  of  the  costs  in  said  action. 

The  undersigned  hereby  waives  notice  from  the 
Vendor  of  the  amount  of  indebtedness,  default  in  pay- 
ment, or  of  the  acceptance  of  this  guaranty. 

IN   WITNESS   WHEREOF,   We  have  hereunto 

subscribed  our  names  at. .  . 

on  this day  of , 

A.  D.,  19.... 

Witness 
Witness 


CREDIT  SAFEGUARDS  361 

CREDIT   INSURANCE 

As  we  have  previously  pointed  out,  the  credit  man's 
objective  is  to  reduce  losses  to  a  minimum  without  cur- 
tailing profits  by  unduly  restricting  sales.  The  credit 
man  could,  of  course,  eliminate  substantially  all  losses 
by  accepting  only  A  i  risks;  but  to  do  this  would  result 
in  so  serious  a  contraction  of  sales  that  the  money  saved 
by  avoiding  credit  losses  would  be  more  than  offset 
by  the  profits  that  would  have  been  earned  by  follow- 
ing a  somewhat  more  liberal  credit  policy.  Therefore, 
to  obtain  a  maximum  of  profits,  the  credit  man  keeps 
accounts  which  involve  comparatively  greater  risk, 
with  the  result  that  some  accounts  turn  out  to  be  abso- 
lute losses.  But  when  these  risks  kre  accepted,  the 
creditor  anticipates  losses  from  some  of  them  and  pro- 
vides against  these  expected  losses  by  setting  up  a 
reserve.  The  amount  to  be  added  to  protect  or  insure 
the  creditor  from  this  normal  or  expected  loss  is  ascer- 
tained from  the  creditor's  experience  with  his  custom- 
ers over  a  period  of  years.  Thus  the  creditor  insures 
himself  against  these  normal  or  expected  losses. 

This,  the  distribution  of  the  losses  of  the  few  among 
the  many,  is  the  fundamental  principle  of  insurance. 
The  aggregate  losses,  however,  which  any  one  creditor 
may  add  to  his  selling  price,  are  necessarily  limited  by 
competition,  and  so  it  behooves  each  creditor  to  keep 
his  losses  to  a  minimum  without  unnecessarily  injur- 
ing his  sales. 


362         CREDITS  AND  COLLECTIONS 

DEFINITION  OF  CREDIT  INSURANCE 

Credit  insurance,  as  devised  by  the  existing  credit 
insurance  companies,  does  not  comprehend  the  normal 
or  expected  loss  above  described.  Credit  insurance,  or 
to  use  a  more  appropriate  nomenclature  suggested  by 
another  writer,  "insurance  to  cover  extraordinary 
losses  in  credits,"  protects  the  insured  only  against  ab- 
normal losses,  that  is,  credit  losses  in  excess  of  the  so- 
called  normal  or  expected  loss  incident  to  the  particular 
business  of  the  insured.  The  normal  or  expected  loss, 
or,  as  it  is  frequently  styled  by  the  insurance  com- 
panies, initial  loss,^  is  usually  expressed  as  a  percentage 
of  the  gross  sales  of  the  insured,  and  must  be  borne 
by  the  insured,  apparently  on  the  theory  that  the  com- 
pany could  not,  for  a  premium  charge  smaller  than 
this  annual  expected  loss,  insure  against  such  loss  each 
year. 

ASCERTAINING  THE  INITIAL   LOSS 

There  are  two  ways  of  fixing  the  initial  loss,  the 
forms  of  policies  being  constructed  accordingly.  Un- 
der one  plan  the  initial  loss  may  be  determined  at  the 
beginning  of  the  term  of  the  policy,  and  made  fixed  and 
binding  upon  both  the  insured  and  the  insurance  com- 
pany, for  the  purpose  of  calculating  the  abnormal  loss 
at  the  expiration  of  the  policy.  In  such  a  case,  if  sales 
for  the  past  five  years  averaged  $1,000,000  and  the 
losses  during  the  same  period  averaged  one-half  of 
one  per  cent,  the  initial  or  "own"  loss  to  be  borne  by 

^  On  account  of  the  fact  that  the  insured  must  himself  bear 
this  initial  loss,  it  is  often  referred  to  as  his  "own  loss." 


CREDIT  SAFEGUARDS  363 

the  insured  is  fixed  at  $5,000,  the  company  being  liable 
only  for  such  part  of  the  insured  losses  as  are  in  excess 
of  the  $5,000  provided  for  in  the  policy. 

Under  a  second  plan  the  final  determination  of  the 
normal  or  initial  loss  is  left  until  the  end  of  the  term 
of  the  policy.  In  this  case,  the  loss  experience  of  the 
insured  during  the  term  of  the  policy  is  available  as 
a  factor  in  the  determination  of  the  proper  initial  loss. 
Thus,  if  a  merchant  doing  a  business  of  $1,000,000 
a  year  has  a  normal  loss  of  one-half  of  one  per  cent 
during  the  five  preceding  years  and  during  the  life  of 
the  policy  loses  double  the  usual  amount,  the  insurance 
company  fixes  six-tenths  of  one  per  cent  of  the  annual 
sales  as  the  initial  loss  to  be  borne  by  the  insured. 

DETERMINING  THE  INSURANCE  PREMIUM 

As  in  practically  all  forms  of  insurance,  the  insured 
must  pay  the  insurance  company  a  premium  for  the 
risk  underwritten  by  the  company.  The  premium  or 
rate  varies  with  the  degree  of  risk  incident  to  the  busi- 
ness of  the  insured  and  is  fixed  by  the  insurance  agent 
after  a  consideration  of  the  following  factors:  (i) 
gross  annual  sales;  (2)  gross  annual  losses  of  the  in- 
sured over  a  period  of  five  or  six  years;  (3)  hazards 
of  the  business  of  the  insured;  (4)  usual  amount  sold 
to  any  one  customer;  (5)  customary  terms  of  sale; 
(6)  efficiency  of  the  insured's  credit  department;  (7) 
amount  of  insurance  desired;  (8)  amount  to  be  cov- 
ered in  any  one  account;  (9)  condition  of  accounts 
now  outstanding  on  the  books  of  the  insured,  and  ( 10) 
the  general  business  outlook.     These  facts  are  ascer- 


364         CREDITS  AND  COLLECTIONS 

tained  by  the  company  to  enable  It,  by  using  good  busi- 
ness sense  and  sound  judgment,  to  formulate  fair  and 
reasonable  premium  rates  and  other  terms. 

Upon  the  expiration  of  the  life  of  the  policy  it  may 
be  renewed  or  allowed  to  expire.  In  the  former  case, 
the  experience  of  the  previous  year  is  a  determining 
factor  in  fixing  the  renewal  rates.  Thus,  if  the  insured 
sustains  larger  losses  than  usual,  the  initial  loss  figure 
will  be  increased  accordingly. 

LIMITATIONS  OF  THE  POLICY 

We  have  already  pointed  out  that  credit  insurance, 
as  the  business  is  now  conducted,  compels  the  insured 
to  assume  an  initial  or  "own"  loss.  Furthermore, 
credit  insurance  usually  does  not  protect  the  insured 
against  losses  sustained  on  account  of  the  failure  of 
debtors  who  are  not  rated  or  who  are  poorly  rated  in 
Dun's  or  Bradstreet's.  If,  however,  this  class  of  debt- 
ors is  covered  by  a  special  rider,  the  insured  must,  first, 
pay  a  very  much  larger  premium,  and,  second,  sustain 
as  least  a  large  part  of  such  losses  as  may  occur. 
Even  where  the  debtor  is  well  rated,  the  amount  in- 
sured is  limited  to  about  25%  or  30%  of  the  lowest 
capital  rating  given  the  debtor  by  Dun  or  Bradstreet. 
Moreover,  the  maximum  provable  loss  on  any  one  ac- 
count is  limited  to  some  definite  sum  or  to  a  definite 
percentage  of  the  face  amount  of  the  policy.  Any  loss 
beyond  these  fixed  limits  is  borne  by  the  insured. 
Thus,  if  the  insurance  limit  were  $500  on  any  one  ac- 
count, and  the  insured  extended  a  credit  of  $1,000  to 
a  rated  customer,  only  $500  of  the  loss  would  be  prov- 


CREDIT  SAFEGUARDS  365 

able  under  the  policy;  and  if  the  debtor  in  question 
were  "off  rated"  or  possessed  no  rating,  the  insured 
could  prove  no  loss  under  the  policy. 


A  CONCRETE  ILLUSTRATION 

To  illustrate  concretely  how  credit  insurance  might 
work  out  in  practice,  let  us  assume  a  firm's  average 
annual  sales  over  a  period  of  five  years  amount  to 
$1,000,000  and  the  average  loss  sustained  for  each 
of  the  same  years  is  $5,000,  or  one-half  of  one  per 
cent.  The  firm  takes  out  a  policy  for  $10,000,  which 
allows  a  maximum  loss  on  any  one  account  of  $2,000. 
This  amount,  however,  must  not  be  in  excess  of 
twenty-five  per  cent  of  the  lowest  capital  rating  of  the 
customer,  who  is  rated  in  second  grade  credit  standing 
or  thirty  per  cent  of  the  one  rated  in  the  first  credit 
grade.  A  premium  of  $500,  i.e.,  5%,  is  probably 
charged.  At  the  end  of  the  year  the  insured  submits  a 
list  of  his  losses.   Some  of  these  are  allowed,  others  not. 

What  is  a  loss  is  carefully  defined  by  the  terms  of 
each  policy.  Not  only  are  cases  of  actual  bankruptcy 
provided  for,  but  also  cases  where  it  is  clearly  evident 
that  the  debtor  will  be  unable  to  pay.  Under  one  form 
of  policy  the  insured  is  required  to  make  every  prac- 
ticable effort  to  collect  the  account  or  as  much  as  pos- 
sible. \\'hatever  is  collected  is  considered  salvage  and 
deducted  from  the  allowed  loss.  Or  the  insured  may 
turn  the  account  over  to  the  insurance  company,  in 
which  case  the  entire  amount  of  the  account  is  con- 
sidered loss,  but  the  insurance  company  retains  for  it- 
self whatever  it  can  collect  from  the  debtor  by  way  of 


366  CREDITS  AND  COLLECTIONS 

settlement  or  through  bankruptcy.  Some  poHcies  make 
it  compulsory  for  the  insured  to  place  in  the  hands  of 
the  insurance  company  all  insolvent  accounts  covered 
by  the  policy  on  which  he  desires  to  prove  losses.  To 
this  form  of  policy  there  has  been  raised  the  valid  ob- 
jection that  the  insurance  company,  when  it  receives 
such  an  account,  will  consider  only  its  own  interests 
to  the  exclusion  of  the  interests  of  the  insured.  Take, 
for  example,  a  case  where  a  debtor  is  insolvent  and 
offers  to  settle  with  his  creditors  at  thirty-five  cents 
on  the  dollar.  Assume  it  is  estimated  that  this  account, 
by  going  through  bankruptcy,  will  pay  forty-five  per 
cent.  The  considerations  which  will  move  a  creditor 
to  accept  a  settlement  have  already  been  discussed.^  If 
he  considered  the  debtor  deserving,  the  creditor  proba- 
bly would  prefer  to  accept  the  lesser  sum.  In  reaching 
this  decision  he  would  be  prompted  either  by  considera- 
tion of  past  or  the  anticipation  of  renewed  relations  in 
the  event  the  business  were  soundly  rehabilitated.  But 
would  this  interest  of  the  creditor  (the  insured) 
prompt  the  insurance  company  to  accept  the  settle- 
ment ?  Hardly !  The  insurance  company  is  more  apt 
to  hold  out  for  forty-five  per  cent,  even  to  the  extent  of 
forcing  the  debtor  into  bankruptcy,  for  its  only  concern 
is  the  immediate  settlement  and  not  the  business  rela- 
tions of  the  creditor  (the  insured)  and  the  debtor. 

TYPICAL   ADJUSTMENTS 

If  the  insured  himself  settles  the  account,  he  de- 
ducts the  amount  received  from  the  allowed  loss.     At 
^  See  page  316,  ante. 


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368         CREDITS  AND  COLLECTIONS 

the  end  of  the  policy  year  he  submits  a  list  of  his  losses, 
which  may  be  as  in  the  preceding  table. 

Thus,  although  the  actual  loss  sustained  by  the  in- 
sured is  $8,775  ($13700  less  $4,925)  he  is  allowed 
to  prove  only  $6,170,  the  difference  being  accounted 
for  by  losses  not  allowed  and  by  the  method  of  deduct- 
ing salvage.  It  will  be  noticed,  for  example,  the  gross 
loss  in  the  E.  F.  Co.  was  $2,500,  the  salvage  $1,125, 
leaving  an  actual  net  loss  of  $1,375-  But  under  this 
policy  the  maximum  allowed  loss  is  $2,000,  and  a  share 
of  the  salvage  equal  to  the  ratio  of  the  allowed  loss  to 

2,000 

gross  loss  is  deducted   from  the  $2,000,  i.  e.,  

2,500 
of  $1,125  "=  $900,  which  deducted  from  $2,000  leaves 
a  net  allowed  loss  of  $1,100. 

Then,  in  the  case  of  the  G.  H.  Co.  only  $1,250  was 

allowed  because  its  lowest  rating  (G  3)   was  $5,000 

and  25%  of  that  amount  is  only  $1,250.     From  this 

allowed  loss  is  deducted  a  proportionate  share  of  the 

1,250 

salvage,  i.  e.,    of  $800,  or  $500,  leaving  a  net 

2,000 
allowed  loss  of  $750.    In  the  case  of  the  I.  J.  Co.,  none 
of  the  loss  was  allowed,  because  the  rating  of  J  4  was 
too  low. 

It  is  interesting  to  note  also  that  in  determining  the 
initial  loss  the  insurance  company  computes  all  losses, 
including  those  that  would  not  be  allowable  under  the 
policy.  For  example,  the  initial  loss  of  $5,000  un- 
doubtedly included  many  losses  of  the  character  of  the 
I.  J.  Co.,  whose  rating  is  so  poor  as  to  exclude  it  from 


CREDIT  SAFEGUARDS  369 

allowable  claims  under  the  policy.  In  practice,  the 
losses  on  such  companies  make  up  a  very  large,  if  not 
a  major  part  of  the  losses.  If,  then,  these  losses 
amounted  to  $2,000  of  the  $5,000  initial  loss  of  the 
insured,  he  would  have  to  sustain  actual  losses  of 
$7,000  before  the  insurance  company  would  have  any 
liability.  This  is  obviously  unfair  to  the  insured.  If 
"off  rated"  losses  are  not  allowable  under  the  policy, 
they  should  not  be  considered  in  computing  the  initial 
loss  to  be  borne  by  the  insured.  The  insurance  com- 
panies should  at  least  clearly  explain  these  points  to 
every  prospective  policy  holder. 

In  the  example  given  above,  we  may  assume  there 
are  no  "various  other  losses."  Then  the  actual  loss 
of  the  insured  would  be  $6,375  ($10,700  gross  loss 
less  $4,325  salvage),  while  the  net  allowed  loss  would 
be  $4,570,  from  which  the  $5,000  "own"  loss  would 
be  deducted,  leaving  the  insured  no  claim  against  the 
company.  On  the  other  hand,  we  may  assume  that 
the  losses  are  increased  by  several  thousand  dollars, 
and  the  net  allowed  loss  amounts  to  $19,000.  We  de- 
duct the  $5,000  initial  loss  and  the  company  is  ap- 
parently liable  for  $14,000.  But  the  policy  is  for  only 
$10,000,  and  the  insured  can  hold  the  company  liable 
only  for  that  amount. 

ARGUMENTS  IN  FAVOR  OF  CREDIT  INSURANCE 

The  advocates  of  credit  insurance  argue  that  it  pos- 
sesses many  distinct  advantages  to  the  insured,  and  in 
addition  stimulates  trade  and  helps  to  prevent  panics. 
Foremost  among  its  advantages  to  the  insured,  credit 


370         CREDITS  AND  COLLECTIONS 

insurance,  it  is  claimed,  enables  a  merchant  to  tell  ir; 
advance  what  his  losses  will  be  (apparently  the  "own" 
loss  plus  the  insurance  premium)  and  thus  enable  him 
to  figure  his  costs  accordingly.  And,  being  secure 
from  abnormal  losses,  the  merchant  can  figure  his 
profits  with  a  reasonable  degree  of  certainty.  Ob- 
viously this  is  untrue.  The  insured  does  not  know 
what  his  losses  will  be!  Even  though  the  insured  in 
extending  credits  should  be  governed  blindly  by  the 
ratings  prescribed  in  the  insurance  policy,  there  is  no 
absolute  assurance  that  his  losses  will  not  be  more  than 
the  face  of  the  policy,  and,  as  we  have  seen,  the  insured 
himself  must  bear  all  losses  in  excess  of  that  amount. 
But  certainly  not  even  the  most  ardent  advocate  of 
credit  insurance  would  suggest  that  a  credit  man 
should  stupidly  follow  the  ratings  and  disregard  all 
other  sources  of  credit  information. 

A  merchant,  for  instance,  may  have  no  rating,  but 
other  sources  of  information  may  show  him  to  be  en- 
tirely worthy  of  a  line  of  credit.  Should  the  credit 
man  in  such  a  case  keep  his  insurance  policy  before  his 
eyes  and  turn  down  this  account  ?  No  sane  man  would. 
But  surely  among  the  numerous  cases  of  this  kind, 
there  will  occur  some  losses.  And  these  losses  are  not 
covered  by  the  credit  insurance  policy.  To  that  ex- 
tent, at  least,  the  insured  cannot  feel  secure  from  ab- 
normal losses,  nor  can  he  accurately  foretell  what  his 
losses  will  aggregate. 

In  the  second  place,  it  is  urged  that  to  remove  the 
peril  of  credit  losses  to  a  merchant  makes  for  stability 
in  credit.  To  quote  a  leading  advocate  of  credit  in- 
surance, "What  merchant,  upon  the  first  approach  of 


CREDIT  SAFEGUARDS  371 

a  flurry,  becomes  excited  over  his  outstandings  and 
plays  a  part  in  trouble  making?  Not  the  one  pos- 
sessing Credit  Indemnity."  The  unsoundness  of  this 
argument  is  quite  apparent.  The  premise  that  the 
"peril  of  credit  losses  is  removed"  is,  as  we  have  dem- 
onstrated above,  untrue,  and  the  argument  must  fail. 
Possibly,  the  insured  has  a  greater  degree  of  confi- 
dence in  the  security  of  his  accounts  covered  by  the  in- 
surance policy,  and  he  is  not  as  inclined  to  press  those 
accounts  too  strongly  for  payment,  thus  precipitate 
their  dow^nfall  and  thereby  further  a  general  panicky 
condition.  But,  if  this  is  so,  is  there  not  just  as  strong 
an  incentive  to  become  careless  in  collecting  these  ac- 
counts and  thus  invite  losses.  Or  will  the  credit  man 
remember  that  his  insurance  premium  next  year  will 
be  higher  if  his  losses  this  year  are  large?  And  will 
not  the  credit  man  strive  to  keep  his  losses  down  below 
the  initial  loss,  and  thus  twice  profit,  first  from  the 
losses  saved,  and  second  from  the  reduction  in  the 
initial  loss  the  following  year.  Truly,  credit  insurance 
can  have  but  little  effect  upon  the  honest  and  able  credit 
man's  treatment  of  his  accounts. 

THE  "oW^n"  loss  theory  UNTENABLE 

The  question  has  been  properly  raised,  "But  why 
this  own  loss  at  all,  if  credits  can  be  insured  ?  Reasons 
have  been  advanced  to  justify  it — some  plausible, 
others  fanciful.  It  is  urged  that  as  a  man  always  ex- 
pects to  have  a  certain  percentage  of  losses,  he  pro- 
vides against  them  by  adding  a  percentage  to  the  sell- 
ing price  of  goods,  and  his  customers  thus  reimburse 


372         CREDITS  AND  COLLECTIONS 

him  for  the  loss ;  that  what  he  loses  above  this  figure 
is  abnormal  and  unprovided-for  loss.  If  a  merchant's 
customers  reimburse  him  for  his  average  loss,  then  in 
effect  he  has  no  loss  at  all,  and  his  bad  debts  are  simply- 
debited  against  his  merchandise  account.  Assume  that 
he  has  an  unexpected  loss  during  a  year,  raising  his 
losses  from  one-half  of  one  per  cent  to  one  per  cent, 
why  can  he  not  add  an  increased  percentage  to  the  sell- 
ing price  of  his  goods  ?  What  simpler  system  of  insur- 
ance? If  it  is  scientific  to  add  the  percentage  of  his 
average  or  'own'  loss  to  the  selling  price  of  goods, 
it  would  be  equally  scientific  to  increase  the  rate.  'Ah ! 
but,'  some  one  says,  'he  knows  what  the  average  loss  is, 
but  he  does  not  know  what  the  abnormal  will  be.  The 
average,  if  it  be  a  correct  average,  must  comprehend 
the  abnormal,  and  can  be  computed  from  year  to  year.' 
"It  may  be  asserted  in  answer  to  this,  that  where 
goods  are  sold  upon  a  close  margin  it  would  not  be 
possible  to  add  anything  to  the  selling  price  over  a 
very  moderate  or  normal  percentage,  to  cover  losses 
from  bad  debts,  without  unduly  increasing  the  price, 
and  thus  inviting  inability  to  make  sales.  If  the  addi- 
tion of  a  percentage  sufficient  to  cover  such  losses  is 
not  feasible,  then  the  'own'  loss  theory  is  a  fallacious 
one.  Take  the  case  cited  where  losses  had  been  in- 
creased from  one-half  of  one  per  cent  to  one  per  cent; 
a  concern  is  carrying  credit  insurance  as  practiced  and 
has  been  assuming  an  'own'  loss  of  one-half  of  one 
per  cent;  it  charges  this  to  the  selling  price  of  goods; 
the  following  year,  however,  its  losses  are  one  per  cent. 
The  policy  of  the  credit-insurance  company  will  be  to 
increase  the  'own'  loss  and,  unless  the  merchant  sub- 


CREDIT  SAFEGUARDS  373 

mits  to  the  increase,  to  decline  to  write  a  new  policy. 
Assuming  that  the  merchant  surrenders,  how  is  he 
going  to  dispose  of  his  increased  'own'  loss?  He 
must  add  it  to  the  selling  price  of  goods.  .  .  . 

"If  a  system  can  be  devised  which  will  insure  credits 
within  reasonable  limitations,  then  it  will  not  be  neces- 
sary to  add  to  the  selling  price  of  goods  the  percentage 
or  ratio  of  failed  accounts  included  in  the  'own'  loss 
class,  and  the  cost  of  goods  to  consumers  will  be  re- 
duced to  that  extent.  Even  assuming  that  there  is 
never  any  necessity  for  increasing  the  'own'  loss  per- 
centage in  computing  the  price  of  goods,  there  is  an 
item  which  must  be  added  to  the  selling  price,  and  that 
is  the  cost  of  the  credit  insurance.  This  cost  is  a  legiti- 
mate expense,  if  it  be  proper  to  carry  credit  insurance 
at  all.  When  these  two  items,  'own'  loss  and  'cost 
of  credit  insurance,'  are  considered  together,  as  they 
should  be,  the  question  immediately  arises  as  to  the 
business  wisdom  of  the  outlay,  this  depending  entirely 
upon  the  economic  utility  of  credit  insurance,  its  scien- 
tific operation,  and  its  adaptability  to  the  special  line 
of  business."  ^ 

SHALL  WE  INSURE? 

Credit  insurance,  as  it  is  at  present  conducted,  pro- 
tects the  insured  to  a  limited  degree  against  certain  un- 
expected credit  losses.  Whether  or  not  we  should  in- 
sure under  this  system  depends  largely  ui)on  the  an- 
swer to  the  following  question :  Can  we  obtain  a  com- 
paratively equal  degree  of  protection  in  any  other  man- 
ner with  a  considerably  smaller  expenditure? 

1  Prendergast,  Credit  and  Its  Uses,  pp.  327,  328,  330. 


374         CREDITS  AND  COLLECTIONS 

Credit  insurance  in  the  long  run  necessarily  adds  to 
the  expense  of  a  business  more  than  the  losses  paid  by 
the  insurance  company.  In  the  aggregate  the  insur- 
ance companies  receive  premiums  amounting  to  proba- 
bly more  than  twice  the  losses  paid.  This  obviously 
must  be  so,  for  the  expenses  of  the  insurance  company 
in  soliciting  and  conducting  business  are  very  high. 
While  in  any  one  year  the  aggregate  losses  paid  may 
exceed  the  premiums  received,  this  is  more  than  offset 
by  the  experience  of  subsequent  years,  for  the  initial 
loss  of  the  insured  increases  automatically.  This  is 
also  true  in  the  experience  of  any  one  insured  mer- 
chant. If  the  loss  he  proves  one  year  exceeds  the 
premium  paid,  the  "own"  loss  is  increased  and  the  in- 
surance company  charges  a  larger  premium  in  ensuing 
years. 

The  above  facts  demonstrate  that  it  is  cheaper  for  a 
merchant  to  carry  his  own  credit  insurance,  by  setting 
up  a  reserve  to  take  care  of  unexpected  losses.  But  is 
it  wiser  for  him  to  do  so?  The  practice  of  many  suc- 
cessful business  houses  as  far  as  their  fire  insurance  is 
concerned  (and  credit  insurance  is  claimed  to  be 
analogous  to  fire  insurance)  has  been  to  carry  the 
hazard  themselves  when  the  risks  are  sufficiently  scat- 
tered and  the  loss  in  any  one  risk  cannot  be  too  severe. 
Thus  a  concern  with  a  thousand  small  buildings  in 
different  parts  of  the  country  might  well  carry  its  own 
fire  insurance.  And  so,  many  of  the  large  steamship 
companies  have  found  it  very  much  more  profitable  to 
carry  their  own  insurance,  for  their  ships  are  widely 
scattered.  Then  would  it  not  be  equally  good  busi- 
ness practice  for  a  concern  having  a  thousand  scattered 


CREDIT  SAFEGUARDS  375 

debtors  to  carry  its  own  credit  insurance  and  save  an 
amount  equal  to  the  salaries  of  solicitors,  agents,  and 
officers  of  credit  insurance  companies,  which  the  in- 
sured in  the  end  must  pay. 

In  the  average  business  firm  the  credit  risk  is  suffi- 
ciently distributed  to  justify  a  policy  of  setting  up  a 
bad  debt  reserve,  instead  of  taking  out  credit  insur- 
ance. But  where  a  firm  sells  only  a  few  accounts,  it 
might  be  otherwise.  Although  if  the  number  of  ac- 
counts were  very  few,  the  merchant  would  probably 
find  the  cost  of  credit  insurance  prohibitive.  Probably 
the  best  course  for  him  is  to  select  his  debtors  with  the 
utmost  care  so  as  practically  to  eliminate  all  risk  of 
loss,  and  to  set  up  a  comparatively  large  reserve  for 
unexpected  losses. 

"But,"  suggests  the  advocate  of  credit  insurance, 
"suppose  a  country-wide  panic  plunged  so  many  debt- 
ors into  bankruptcy  that  the  merchant's  reser\'e  be- 
comes insufficient  to  take  care  of  all  the  losses.  What 
then!"  As  an  answer  it  is  suggested  that  if  the  losses 
were  so  severe  it  is  a  question  whether  any  credit  in- 
surance company  is  now  strong  enough  to  stand  the 
strain  at  all.  Moreover,  in  such  a  case,  the  insured 
would  find  his  policy  was  not  large  enough. 

THE  BEST  CREDIT  INSURANCE 

From  a  careful  consideration  of  the  foregoing,  we 
are  forced  to  the  conclusion  that  the  practical  course  to 
pursue  is  the  adoption  of  measures  and  the  observance 
of  principles  which  will  minimize  credit  losses.  The 
well-informed,  clear-sighted  credit  man  adopts  proper 


376         CREDITS  AND  COLLECTIONS    ' 

measures  and  follows  correct  principles.    He,  th^n,  is 
the  best  credit  insurance  any  business  can  have ! 


THE  NATIONAL  ASSOCIATION  OF  CREDIT  MEN 

The  National  Association  of  Credit  Men  was 
formed  in  1896  with  a  membership  of  600.  To-day 
(1917)  over  20,000  of  the  largest  bankers  and  mer- 
chants in  the  United  States  are  members.  These  bank- 
ers and  business  houses,  united,  are  a  powerful  factor 
to  protect  and  develop  sound  credits.  To  secure  these 
ends,  the  activity  of  the  Association  is  not  confined  to 
any  narrow  field.  On  the  contrary,  the  Association 
is  engaged  in  a  very  broad  scope  of  constructive  work. 
For  instance,  the  Association  is  earnestly  endeavoring 
to  have  enacted  certain  commercial  laws  for  the  pro- 
tection of  credits.  Among  these  are  laws  to  regulate 
the  sale  of  stocks  of  goods  in  bulk,  to  penalize  the  giv- 
ing of  false  statements,  to  regulate  the  doing  of  busi- 
ness under  fictitious  names,  to  regulate  collection  agen- 
cies, to  punish  fake  advertising,  etc.  Not  only  is  the 
Association  interested  in  having  the  laws  enacted,  but 
it,  and  the  local  branches  in  the  larger  cities,  see  to 
it  that  the  laws  are  enforced.  A  Legislative  Commit- 
tee of  the  Association  devotes  its  attention  to  the  enact- 
ment of  the  laws,  while  an  Investigation  and  Prosecu- 
tion Committee  supervises  efforts  to  prosecute  offend- 
ers and  fraudulent  debtors. 

This  work  is  especially  important,  for  the  individual 
creditor  has  been  disinclined  to  undertake  the  prosecu- 
tion of  fraudulent  debtors  on  account  of  the  expense 


CREDIT  SAFEGUARDS  377 

mvolved  and  time  consumed.  Now,  however,  the  As- 
sociation carries  the  burden,  and  its  activity  in  this 
direction  has  been  so  great  that  crooked  debtors  are 
beginning  to  fear  and  appreciate  the  wrath  and  power 
of  the  Association.  The  result  is  that  the  individual 
creditor  finds  that  he  is  better  protected,  and  the  entire 
credit  structure  is  strengthened. 

OTHER  ACTIVITIES  OF  THE  ASSOCIATION 

In  addition  to  the  activities  described  above,  the  As- 
sociation through  its  standing  committees  is  actively 
engaged  in 

1.  Improving  the  administration  of  the  bankruptcy 
law. 

2.  Promoting  reforms  in  the  banking  and  currency 
system. 

3.  Making  more  efficient  mercantile  agency  service, 
by  co-operating  with  the  commercial  agencies. 

4.  Reducing  the  country's  excessive  fire  waste  and 
encouraging  protection  against  loss  by  fire. 

5.  Popularizing  the  principle  of  commercial  arbitra- 
tion. 

6.  Arousing  interest  and  activity  in  the  prosecution 
of  commercial  fraud. 

7.  Developing  effective  credit  department  methods. 

8.  Encouraging  credit  education. 

9.  Aiding  generally  the  elevation  of  business  stand- 
ards, principally  through  the  dissemination  of  helpful 
business  literature  and  through  active  educational 
work. 


378         CREDITS  AND  COLLECTIONS 

ADVANTAGES  OF  MEMBERSHIP  TO  THE  INDIVIDUAL 
CREDIT    MAN 

The  above  activities  of  the  Association  result  in  sub- 
stantial benefits  to  the  entire  business  community,  and 
necessarily  are  helpful  to  the  individual  creditor, 
whether  or  not  he  is  a  member  of  the  Association. 
But,  surely  no  creditor  can  be  selfish  enough  to  accept 
the  benefits  of  other  creditors'  labors,  unless  he  con- 
tributes something  to  bring  about  these  beneficial  re- 
sults. This  the  individual  creditor  can  best  accomplish 
by  joining  the  local  branch  of  the  National  Associa- 
tion and  by  actively  co-operating  with  it  in  accom- 
plishing its  worthy  purposes. 

In  addition  to  these  general  benefits  which  all  mem- 
bers derive,  the  individual  creditor  profits  in  numerous 
ways  through  his  affiliation  with  the  Association.  For 
example,  membership  in  the  Association  often  opens 
the  way  to  the  interchange  of  ledger  experience  be- 
tween members  located  in  different  parts.  Inquiry 
forms,  which  have  been  described  in  the  chapter  on 
Sources  of  Information,  bearing  the  imprint  of  the 
Association,  are  usually  more  effective  than  other 
means  in  gaining  the  information  or  results  desired. 
Moreover,  standard  forms  of  financial  statements  may 
be  obtained  from  the  Association  and  used  to  advan- 
tage. 

PUBLICATIONS  OF  THE  ASSOCIATION 

The  individual  member  receives  from  the  Associa- 
tion (i)  A  FiRST-OF-THE-MoNTH  Letter  Containing 
brisk  and  brief  items  of  information,  advice  and  cau- 


CREDIT  SAFEGUARDS  379 

tion  upon  legal  decisions,  commercial  statutes,  and  sit- 
uations affecting  the  integrity  of  credits.  (2)  A 
Monthly  Bulletin,  which  is  the  only  exclusive  jour- 
nal of  credits  published — a  monthly  compendium  of 
credit  activities,  interesting  papers  and  articles  on 
credit  or  allied  subjects  and  on  the  doings  of  the  Asso- 
ciation. One  of  the  monthly  bulletins  gives  in  detail 
the  proceedings  of  the  convention  of  the  Association, 
which  is  held  in  the  summer  of  each  year.  The  Bul- 
letin may  well  be  described  as  the  link  between  the 
credit  grantor's  desk  and  a  nation-wide  work.  (3) 
Leaflets  and  pamphlets  for  the  direct  education  of  the 
retail  merchant. 


REPORTS  ON  collection  AGENCIES 

The  individual  member  may  also  obtain  from  tiie 
Association  a  confidential  report  on  any  active  collec- 
tion agency  or  collection  attorney  with  whom  collec- 
tion agreements  are  about  to  be  made.  This  is  an 
important  and  useful  service  to  have  at  command,  for 
there  are  many  disreputable  collection  concerns  pre- 
tending to  make  efficient  collections. 

ADJUSTMENT    BUREAUS 

In  addition,  the  Association  has  thoroughly  organ- 
ized branches  in  over  one  hundred  centers  of  manufac- 
ture and  trade.  There  is  scarcely  a  state  without  at 
least  one  branch.  A  majority  of  them  have  estal)Hshed 
efficient  adjustment  bureaus  for  the  handling  of  in- 
solvency claims,  the  administration  of  temporarily  cm- 


38o         CREDITS  AND  COLLECTIONS 

barrassed  concerns,  and  for  investigations  when  ex- 
tensions are  asked.  These  bureaus,  while  conducted 
under  affiliated  branches  of  the  Association,  are  ac- 
countable for  their  conduct  to  the  National  Associa- 
tion, which  acts  as  a  court  of  appeal  in  cases  of  griev- 
ance. 

CREDIT  EXCHANGE  BUREAUS 

A  majority  of  the  branches  also  conduct  credit  ex- 
change bureaus,  which  are  at  the  service  of  individual 
members,  who,  at  moderate  charge,  will  be  supplied 
with  reports  on  the  actual  experience  of  members  with 
the  subject  of  inquiry.  Against  dangerous  credit  ex- 
tensions these  bureaus  have  offered  protection  more 
definite  and  trustworthy  than  any  other,  and  have  also 
made  possible  safe  and  profitable  credits  which  other- 
wise would  have  been  denied. 

In  conclusion,  then,  considering  the  advantages  of 
membership  in  the  Association,  every  credit  man 
should  become  actively  affiliated  with  his  local  associa- 
tion and  with  the  National  Association  of  Credit  Men. 

CANONS    OF    COMMERCIAL    ETHICS    ADOPTED    BY    THE 
NATIONAL  ASSOCIATION  OF   CREDIT   MEN 

I.  "It  is  improper  for  a  business  man  to  participate 
with  a  lawyer  in  the  doing  of  an  act  that  would  be  im- 
proper and  unprofessional  for  the  lawyer  to  do. 

II.  "It  undermines  the  integrity  of  business  for  busi- 
ness men  to  support  lawyers  who  indulge  in  unpro- 
fessional practices.  The  lawyer  who  will  do  wrong 
things  for  ONE  business  man  injures  ALL  business 


CREDIT  SAFEGUARDS  381 

men.    He  not  only  injures  his  profession,  but  he  is  a 
menace  to  the  business  community. 

III.  "To  punish  and  expose  the  guilty  is  one  thing; 
to  help  the  unfortunate  but  innocent  debtor  to  rise  is 
another;  but  both  duties  are  equally  important,  for 
both  duties  make  for  a  higher  moral  standard  of  action 
on  the  part  of  business  men. 

IV.  "In  times  of  trouble  the  unfortunate  business 
man  has  the  right  to  appeal  to  his  fellow  business  men 
for  advice  and  assistance.  Selfish  interests  must  be 
subordinated  in  such  a  case,  and  all  must  co-operate  to 
help.  If  the  debtor's  assets  are  to  be  administered,  all 
creditors  must  join  in  co-operating.  To  fail  in  such  a 
case  is  to  fall  below  the  best  standards  of  commercial 
and  association  ethics. 

V.  "The  pledged  word  upon  which  another  relies  is 
sacred  among  business  gentlemen.  The  order  for  a  bill 
of  goods  upon  which  the  seller  relies  is  the  pledged 
word  of  a  business  man.  No  gentleman  in  business, 
without  a  reason  that  should  be  satisfactory  to  the 
seller,  may  cancel  an  order.  He  would  not  ask  to  be 
relieved  of  his  obligation  upon  a  note  or  check,  and  his 
contracts  of  purchase  and  sale  should  be  equally  bind- 
ing. The  technical  defense  that  he  has  not  Ixnind  him- 
self in  writing  may  avail  him  in  the  courts  of  law  but 
not  of  business  ethics. 

VI.  "Terms  of  sale  as  a  part  of  a  contract  touching 
both  net  and  discount  maturity,  are  for  buyer  and 
seller  alike  binding  and  mutual,  unless  modified  by 
previous  or  concurrent  mutual  agreement. 

"No  business  gentleman  may,  in  the  performance  of 
his  contracts,  seek  small  or  petty  advantage,  or  throw 


382         CREDITS  AND  COLLECTIONS 

the  burden  of  a  mistake  in  judgment  upon  another,  but 
must  keep  his  word  as  good  as  his  bond,  and  when  en- 
tering into  a  contract  of  sale  faithfully  observe  the 
terms,  and  thus  redeem  the  assumed  promise. 

VII.  "It  is  always  improper  for  one  occupying  a 
fiduciary  position  to  make  a  secret  personal  profit 
therefrom.  A  member  of  a  creditors'  committee,  for 
example,  may  not,  without  freely  disclosing  the  fact, 
receive  any  compensation  for  his  services,  for  such 
practices  lead  to  secret  preferences  and  tend  to  destroy 
the  confidence  of  business  men  in  each  other.  'No 
man  can  serve  two  masters.' 

VIII.  "The  stability  of  commerce  and  credits  rests 
upon  honorable  methods  and  practices  of  business  men 
in  their  relations  with  one  another,  and  it  is  improper 
for  one  creditor  to  obtain  or  seek  to  obtain  a  prefer- 
ence over  other  creditors  of  equal  standing  from  the 
estate  of  an  insolvent  debtor,  for  in  so  doing  they  take, 
or  endeavor  to  take,  more  than  their  just  proportion 
of  the  estate  and  therefore  what  properly  belongs  to 
others." 

IX.  "Co-operation  is  unity  of  action,  though  not 
necessarily  unity  of  thought.  When  the  administra- 
tion of  an  insolvent  estate  is  undertaken  by  the  credi- 
tors through  friendly  instrumentalities,  or  when  after 
critical  investigation  creditors  representing  a  large 
majority  of  the  indebtedness  advise  the  acceptance  of 
a  composition  as  representing  a  fair  and  just  dis- 
tribution of  a  debtor's  assets,  it  is  unco-operative  and 
commercially  unethical  for  a  creditor  to  refuse  the 
friendly  instrument  or  the  composition  arbitrarily  and 
force  thereby  a  form  of  administration  that  will  be 
prejudicial  and  expensive  to  the  interests  of  everyone 
concerned." 


INDEX 


Acceptances,  21. 

Accommodation  endorsements, 
214. 

Accommodation  paper,  44,  45. 

Accounts,  assignment  of,  243 ; 
guaranty  of,  358;  opening 
new,  82 ;  progress  of,  83 ;  re- 
ceivable, 218. 

Acts  of  bankruptcy,  2,27. 

Adjustment  bureaus,  319,  379; 
purposes  of,  319;  advantages 
of,  320;  winding  up  an  es- 
tate, 321  ;  activity  of  adjust- 
ment bureau  in  bankruptcy 
cases,  322;  adjustment  pro- 
cedure, 323  ;  results,  325  ;  re- 
port of  Spokane  Merchants' 
Association  for  year  191 1, 
326;  future  of  adjustment 
bureau,  326. 

Adjustments,  306. 

Agencies,  collection,  277 ; 
Bradstreet  and  Dun,  100; 
special,  124. 

Agency  report,  content  of,  104; 
typical  reports,  no,  127. 

Analysis  of  financial  statement, 
211. 

Assets  in  financial  statement, 
217. 

Assignment  of  accounts,  243. 

Attachment,  299. 

Attorneys  as  credit  reporters, 
165;  information  obtainable 
by,  I-66 ;  qualifications  of, 
166;  quality  of  reports,  168; 
prejudice  in,  168;  remuner- 
ation of,  171 ;  attention  to  in- 


quiries, 171 ;  attorneys'  lists, 
172;  listing  fee,  173;  collec- 
tions by,  273 ;  in  bankruptcy, 
.135- 

Attorneys,  emplorj'ment  of,  in 
making  collections,  273. 

Attorney's  report,  specimen 
form  of,  172. 

Attorneys,  unscrupulous,  335. 

Bank  draft,  20. 

Bank,  functions  and  duties  of, 
40;  credit  standards  of,  41; 
restricted  to  short  term 
loans,  41  ;  Federal  Reserve, 
52;  information  concerning 
credit,  174;  co-operation  of 
bank,  174;  confidential  infor- 
mation, 176;  credit  depart- 
ment of  bank,  176;  informa- 
tion obtainable,  176. 

Bank  loans,  40;  form  of,  41. 

Banking  credit,  35,  39. 

Banking  discounts,  68. 

Bankruptcy,  discharge  in,  353 ; 
insolvency  and  receiverships, 
327;  legislation,  2,27;  theory 
of  laws,  327;  provisions  of 
laws,  329;  federal  and  state 
laws,  329;  origin  of,  330; 
history  of,  331 ;  receiver- 
ships, 332;  voluntary  and  in- 
voluntary, 334 ;  conditions 
compelling  bankruptcy.  334; 
objects  of,  ^?t2\  unscrupulous 
attorneys,  335 ;  who  may  l)e- 
come  bankrupts,  ^}i7 ;  tiie  five 
acts  of  bankruptcy,  ii7  ;  pro- 


383 


3^4 


INDEX 


visional  remedies  pending  in- 
voluntary adjudication,  339; 
trial,  341 ;  referees,  341  ; 
schedules,  342;  meetings  of 
creditors,  342 ;  the  trustee, 
343 ;  duties  of  the  trustee, 
344;  proof  and  allowance  of 
claims,  345 ;  debts  which  may 
be  proved,  346;  filing  proof 
of  claims,  347 ;  allowable 
claims,  348;  voidable  prefer- 
ences, 348;  priority  and  pay- 
ment of  debts,  349;  dividends 
in  bankruptcy,  350;  composi- 
tions in  bankruptcy,  351 ;  dis- 
charge of  the  bankrupt,  353 ; 
conditions  of  discharge,  354 ; 
debts  undischarged,  355 ;  the 
credit  man  and  the  bank- 
ruptcy act,  356. 

Basis  of  credit,  the,  92. 

Bills  of  Exchange,  20. 

Book  accounts,  13. 

Bonds,  16;  debenture,  16;  in- 
come, 16 ;  mortgage,  16 ;  pur- 
poses of  issue,  17. 

Bradstreet,  John  M.,  100. 

Bradstreet's  Improved  Com- 
mercial Agency,  100. 

Bulk  sales  law,  301 ;  use  of  the, 
303. 

"Bulletin"  of  the  National  As- 
sociation    of     Credit     Men, 

379- 
Bureau,  credit  exchange,  128; 
retail,  151 ;  adjustment,  319. 

Capital,  228. 

Capital  stock,  228. 

Capacity,  as  a  basis  of  credit, 

92. 
Cards,  corporation,  183. 
Cash  before  delivery  terms,  69. 
Cash,  C.  O.   D.  and  C.  B,  D. 

terms,  69. 
Cash  on  delivery  terms,  69. 
"Cash"  sales  involve  credit,  70. 
Cash  terms,  70. 


Cashier's  check,  20. 

C.  B.  D.  terms,  69. 

Certified  checks,  19. 

Character,  250;  as  a  basis  of 
credit,  92. 

Checks,  18;  cashier's  20;  certi- 
fied, 19. 

Claims  in  bankruptcy,  345. 

Classes  of  credit,  34. 

Classes  of  credit  and  credit 
machinery,  33. 

Clearing    House,    the    Credit, 

Clearing  information,  132,  154. 

C.  O.  D.  terms,  69. 

Collateral  notes,  46. 

Collection  agencies,  277. 

Collection  correspondence,  261. 

Collection  forms,  attorney, 
277 ;  agency,  279. 

Collection  systems,  254;  the 
monthly  statement,  254 ;  fol- 
low up  systems,  256;  the 
tickler  system,  257 ;  the  use 
of  drafts,  258;  indorsement 
or  notation  on  unhonored 
drafts,  261 ;  collection  corre- 
spondnece,  261 ;  actual  pro- 
cedure, 263 ;  specimen  draft 
of  collection  agency,  269; 
weak  debtors,  270;  notes, 
272 ;  attorneys,  273 ;  forward- 
ing lawyers,  276;  collection 
agencies,  277 ;  collection 
agency  forms,  279 ;  special 
problems  in  collection,  281 ; 
interest  on  past  due  items, 
281 ;  collecting  interest  on 
past  due  items,  282;  the  un- 
earned discount  abuse,  283; 
defective  remittances,  286. 

Collections,  84,  250 ;  actual  pro- 
cedure in,  263 ;  credit  man's 
activities  in  making,  84;  spe- 
cial problems  in,  281. 

Commercial  letter  of  credit,  25. 

Commercial  versus  banking 
discounts,  68. 


INDEX 


38= 


Compositions,  306,  in  bank- 
ruptcy, 351. 

Composition  settlements,  315; 
when  to  agree  to  composi- 
tion, 316;  legal  aspects  of  a 
composition,  318. 

Confidence  as  basis  of  credit, 
10. 

Confidence,  three  elements  of, 
92. 

Construction  of  financial  state- 
ment, 211. 

Content  of  agency  report,  104. 

Corporate  stock,  18. 

Corporation  cards,  183. 

Corporation  financial  state- 
ment, 213. 

Corporation  manuals,  supple- 
ments and  cards,  183. 

Correspondence,  collection,  261. 

Credit,  defined,  4;  nature  of,  5; 
uses  and  advantages  of,  6; 
amount  used,  8;  forms  of, 
12;  letters  of,  22;  personal, 
56;  terms  of,  66;  basis  of, 
92 ;  limit  of,  94. 

Credit  agencies,  general  and 
special,  96. 

Credit  and  credit  machinery, 
43- 

Credit,  banking,  39;  mercantile, 
39,  63. 

Credit  capacity  of  applicant, 
94. 

Credit  Ckaring  House,  137. 

Credit  Clearing  House  report, 
140. 

Credit  conditions  in  1914,  57- 

Credit  department  investigator, 
146 ;  tactics  of  the,  148. 

Credit  equation,  the,  94. 

Credit  exchange  bureaus,  128, 
130,  151 ;  operation  of  the, 
129;  objections  to,  134. 

Credit  in  "cash"  sales,  70. 

Credit  information,  sources  of, 
96. 


Credit  insurance,  361 ;  deter- 
mining premium,  363. 

Credit  machinery,  34,  35,  43. 

"Credit  man,"  the,  i ;  respon- 
sibilities of  the,  4;  develop- 
ment of,  T];  duties  and 
qualifications  of,  Tj,  79; 
vigilance  required  of,  83; 
qualifications  of,  87;  attitude 
of,  91  ;  benefits  of  personal 
interview  with,  179;  as  the 
best  credit  insurance,  376. 

Credit  Men's  Association,  the 
National,  376. 

Credit  reports,  see  Reports. 

Credit  representatives,  travel- 
ling, 181. 

Credit  risk,  factors  in,  60;  ele- 
ments determining  the,  90. 

Credit  safeguards,  358;  guar- 
antees, 358;  form  of  guaran- 
ty, 359;  National  Association 
of  Credit  Men,  376. 

Credit  insurance,  361  ;  defined, 
362;  ascertaining  the  initial 
loss,  362;  determining  pre- 
mium, 363  ;  limitations,  364 ; 
a  concrete  illustration,  365 ; 
typical  adjustments,  366; 
arguments  in  favor  of  credit 
insurance,  369;  "own  loss" 
theory  untenable,  371 ;  shall 
we  insure,  2>72> ;  economy  of 
credit  insurance,  374;  the 
best  credit  insurance,  375. 

Creditor,  the,  legal  remedies 
of,  288. 

Crisis  of  1837,  the,  98. 

Customers,  knowledge  concern- 
ing, 81. 

Dating,  70;  season,  T2. 

Debenture  bonds,  16. 

Definition  of  credit.  4. 

Delinquents,  252;  classes  of, 
252;  treatment  of  the  differ- 
ent classes  of,  253. 

Direct  financial  statements,  187. 


386 


INDEX 


Direct  interchange  of  ledger 
experience,  142;  form  used 
for,  143. 

Discount,  unearned,  283. 

Discounts,  67;  banking,  68; 
commercial  versus  banking, 
68. 

Dividends,  bankruptcy,  350. 

"Double  name"  paper,  43. 

Doughlass,  Benjamin,  99. 

Drafts,  bank,  20;  bills  of  ex- 
change, 21 ;  acceptances,  21 ; 
the  use  of  in  collections,  258. 

Dun,  R.  G.,  &  Co.,  99. 

Dun,  Robert  Graham,  99. 

Dun's  and  Bradstreet's,  begin- 
nings of,  99. 

Duties  of  the  credit  man,  78. 

Educational  qualifications  of 
credit  man,  87,  88. 

Elements  determining  the 
credit  risk,  90. 

"End  of  month"  terms,  74. 

Ethics,  canon  of,  380. 

Exchange,  bills  of,  20. 

Exemptions,  242. 

Extensions,  compositions  and 
adjustments,  306. 

Extensions,  306,  309;  motives 
prompting  an  extension,  306; 
the  humanitarian  side,  308; 
when  to  grant  an  extension, 
315;  reasons  for  debtor's  em- 
barrassment, 310;  the  situa- 
tion in  the  South  in  1914,  311 ; 
the  situation  of  a  metropoli- 
tan store,  311;  legal  aspects 
of  extensions,  314. 

"False  statement,"  defined,  197 ; 
prosecutions  for,  under  state 
laws,  196;  under  federal  law, 
203. 

"False  statement"  laws,  192 ; 
New  Jersey  law,  193 ;  three 
statutes  of  1912,  195 ;  penal- 
ties under,  195;  reforms  un- 


der, 195;  the  Federal  law, 
203. 

Federal  Reserve  Act,  44;  effect 
of,  44;  provisions  of  for  dis- 
counting notes,  drafts  and 
bills  of  exchange,  53 ;  amend- 
ment to,  55. 

Federal  Bankruptcy  Law,  329. 

Federal  Reserve  Banks,  52. 

Federal  Reserve  Board,  52. 

Financial  statement,  the,  186; 
obtained  through  agencies, 
186;  obtained  direct,  187;  ad- 
vantages of  direct  statement, 
187 ;  specimen  form  of.  Brad- 
street,  188;  false  statement 
laws,  192;  penalties  under 
false  statement  law,  195; 
financial  statement  as  the 
basis  of  credit,  202 ;  ad- 
vantages to  the  merchant, 
204 ;  reciprocal  value  of,  205  ; 
National  Association  of 
Credit  Men,  statement  blank 
recommended  by,  207;  re- 
quired at  regular  intervals, 
211. 

Financial  statement,  the  con- 
struction and  analysis  of, 
211;  significance  of  figures, 
211 ;  forms  suggested  for  cor- 
porations, 213;  assets  and  lia- 
bilities, how  described  and 
valued  in,  217;  assets,  217; 
cash,  217;  accounts  receiv- 
able, 218;  notes  receivable, 
220;  advances  to  officers, 
salesmen  and  others,  221 ; 
merchandise,  222;  deferred 
assets,  224;  plant,  machinery 
and  tools,  225  ;  furniture  and 
fixtures,  225;  real  estate,  226; 
intangible  assets,  226 ;  lia- 
bilities, 226;  accounts  pay- 
able, 226 ;  notes  payable,  226 ; 
deposits,  227;  accrued  liabili- 
ties, 22^  ;  bonded  indebted- 
ness,  22"]  \    mortgages,   22T, 


INDEX 


387 


reserves,  228;  capital,  228; 
capital  stock,  228;  surplus, 
229;  net  worth  of  the  busi- 
ness, 228;  working  capital, 
232;  collateral  information, 
233 ;  accounts  and  notes  re- 
ceivable past  due,  2^s ',  in- 
vestments, 234 ;  insurance, 
235 ;  accounts  and  notes  pay- 
able past  due,  236;  mort- 
gages and  bonds,  237;  con- 
tingent liabilities,  237 ;  ac- 
commodation notes,  238;  net 
sales,  239;  expenses,  240; 
profits,  240;  dividends,  240; 
incorporation,  241 ;  secured 
creditors,  241 ;  suits  pending, 
241 ;  inventory,  241 ;  books  of 
account,  241  ;  bank  with,  242 ; 
other  information,  242 ;  ex- 
emptions, 242 ;  assignment  of 
accounts  receivable,  243 ;  ad- 
vantages of,  245;  objections 
to,  246;  comparison  with 
previous  statements,  248; 
ratio  of  assets  to  liabilities, 
249;  the  human  equation,  249. 

Floating  debt,  232. 

Follow-up  systems,  256. 

Forms  of  bank  loans,  41. 

Forms  of  credit,  12. 

Forms  of  investment  credit,  37. 

Garnishment,  301. 

General     and     special     credit 

agencies,  96. 
Guarantee  of  accounts,  358. 

Human  equation,  the,  249. 
Humanitarian  side,  the,  308. 

Income  bonds,  16. 
Indebtedness       reports,       154! 

specimen  report,  155. 
Information   blank,   Wholesale 

Shoe  League,  137. 
Information,  clearing  the,  132. 


Information  exchanged  by 
members  of  a  credit  bureau, 

Initial  loss,  see  Credit  insur- 
ance. 

Insolvency,  327;  see  Bank- 
ruptcy. 

Insurance,  fire,  235;  see  Credit 
insurance. 

Interest,  on  past  due  items, 
281 ;  collection  of,  282. 

Interview,  personal,  as  source 
of  information,  178. 

Investigations,  preliminary  to 
credit-granting,  94. 

Investigator,  credit  department, 
146. 

Investment  credit,  36;  forms 
of,  37;  sources  of,  37. 

Investment  credit  and  business 
management,  39. 

Investors,  classes  of,  37. 

Involuntary  bankruptcy,  334. 

Ledger  experience,  direct  inter- 
change of,  142. 

Ledger  report  blank,  81. 

Legal  remedies  of  the  creditor, 
288;  unpaid  seller's  lien,  288; 
when  right  may  be  exercised, 
288;  lien  after  part  delivery, 
289;  when  lien  is  lost,  289; 
stoppage  in  transitu,  290; 
Uniform  Sales  Act,  290;  re- 
sult of  stoppage  in  transitu, 
294 ;  resale  by  the  seller,  294 ; 
rescission  by  the  seller,  296; 
recovery  of  the  goods,  296; 
waiver  of  right  to  recover, 
299;  attachment,  299;  supple- 
mentary proceedings,  301 ; 
garnishment,  301  ;  bulk  sales 
law,  301 ;  use  of  the,  303. 

Letters  of  credit,  22  ;  traveler's, 
23;  commercial,  25. 

Lien,  unpaid  sellers,  288. 

Limit  of  credit,  the,  94. 

Loans,  bank,  40. 


388 


INDEX 


Loans,  through  note  brokers, 
48. 

Mercantile  agency,  defined  96; 
the  first,  98;  beginnings  of 
the,  loi ;  reports,  loi ;  or- 
ganization of  the,  102;  extent 
of  service,  log. 

Mercantile  credit,  39,  63; 
sources  of,  64. 

Mercantile  agency  reports,  loi. 

Merchandise,  value  of,  222. 

Metropolitan  store,  a,  312. 

Model  agency  report,  119. 

Money  orders,  22. 

Monthly  "Bulletin,"  Credit 
Men's  Association,  379. 

Moody's  corporation  manual, 
183. 

Mortgage  bonds,  16,  227. 

Mortgages,  227,  237. 

National  Association  of  Credit 
Men,  376;  history  and  scope 
of,  376 ;  other  activities,  ZT7 ; 
advantage  of  membership  in, 
378;  publications  of,  378; 
monthly  Bulletin,  379;  re- 
ports on  collection  agencies, 
379;  adjustment  bureaus, 
379;  credit  exchange,  380; 
canon  of  ethics  adopted  by, 
380. 

National  credit  interchange  bu- 
reau, 137. 

Net  vi^orth  of  a  business,  228. 

New  accounts,  opening,  82. 

Note  broker,  48. 

Notes,  accommodation  en- 
dorsement of,  44;  denomina- 
tions of,  handled  by  brokers, 
50;  discounted  at  bank,  44, 
49;  Federal  Reserve,  52;  in 
collecting  accounts,  272 ; 
promissory,  14;  purposes  of 
issue,  17 ;  secured  by  collat- 
eral, 46. 


Oral  investigation  as  source  of 

information,  147. 
"Own  loss"  in  credit  insurance, 

362. 
"Own  loss"   theory  untenable, 

371. 

Panics,  theory  of,  2. 

Payments,  credit  instruments 
used  in,  32. 

Personal  credit,  defined,  56 ; 
reasons  for  carelessness  in 
granting,  58;  proper  basis  of, 
60. 

"Personal  interview"  credit  in- 
formation, 178;  the  credit 
man's  attitude,  179;  advan- 
tages of  personal  interview, 
179;  travelling  credit  repre- 
sentatives, 181 ;  accuracy  of 
information,  182. 

Poor's  corporation  manual, 
183. 

Preferences  in  bankruptcy,  348. 

Progress  of  accounts,  83. 

Promissory  notes,  14;  advan- 
tages of,  15. 

Prosecutions  under  false  state- 
ment laws,  192. 

Publications,  trade  and  finan- 
cial, 184. 

"Pyramiding,"  2. 

Qualifications   of   credit  appli- 
cant, 95. 
Qualifications    of    credit    man, 

87. 
Questionnaire,  216. 

R.  O.  G.  terms,  75. 

Railroads  and  public  utilities, 
credit  information,  184. 

Ratings,  105 ;  elements  consid- 
ered in,  105;  R.  G.  Dun  & 
Co.,  form  of,  106;  Brad- 
street,  107;  practical  use  of, 
108. 


INDEX 


389 


Ratio  of  assets  to  liabilities, 
249. 

Receipt  of  goods  terms,  75. 

Receiverships,  332. 

Referees  in  bankruptcy,  341. 

References  in  bankruptcy,  341. 

Remittances,  defective,  286. 

Reports,  mercantile  agency, 
loi ;  typical  agency,  no;  spe- 
cial agenc}-,  118;  model 
agency,  119;  attorneys,  168; 
salesmen,  162 ;  credit  ex- 
change bureau,  135 ;  retail 
Credit  bureau,  154;  Credit 
Clearing   House,    140;   bank, 

174. 
Resale  by  the  seller,  294. 
Rescission  by  the  seller,  296. 
Reserve  Act,  Federal,  52. 
Reserves,  228. 
Retail    credit,    56;    basis     for 

granting,  60. 
Retail  credit  exchange  bureaus, 

151;  functions  of,  156. 

Sales,  stimulating,  86;  bulk 
sales  restricted,  301. 

Salesman,  the,  as  a  source  of 
credit  information,  157;  in- 
formation obtainable  by,  158; 
value  of  salesman's  informa- 
tion, 160;  securing  the  co-op- 
eration of,  161 ;  credit  re- 
port, specimen  form,  162; 
extent  of  information  asked 
for,  163. 

Season  dating^  72. 

Schedules  filed  in  bankruptcy, 
342. 

Shares  of  stock,  17. 

"Single  name"  paper,  43. 

Sources  of  credit  information, 

96- 
Sources   of   investment   credit, 

37- 
South,  the,  in  1914,  311. 
Special  agencies,  124;  field  of 

the,  125. 


Special  agency  report,  118,  127. 

Specimen  report,  special 
agency,  127;  general  agency, 
no. 

Spokane  Merchants'  Associa- 
tion, 326. 

Standard  statistics  cards,  183. 

State  bank  privileges  in  dis- 
counts under  New  York  law, 
54- 

Statement,  the  financial,  186. 

Statement  blank,  National  As- 
sociation of  Credit  Men,  206. 

Statement  form.  Federal  Re- 
serve Bank  of  New  York, 
200. 

Stimulating  sales,  86. 

Stock,  17;  corporate,  18; 
shares  of  stock,  17. 

Stoppage  in  transitu,  290. 

"Subjects  of  Inquiry,"  speci- 
men blank,  131. 

Systems  employed  in  credit 
exchange,  128. 

Tappan,  Louis,  pioneer  mer- 
cantile agent,  98. 

Terms,   69;    cash   on   delivery, 
69;  cash  before  delivery,  6g 
C.  O.  D.,  69;  C.   B.   D.,  69 
cash,  70;  end  of  month,  74 
R.    O.    G.,    75;    receipt    of 
goods,  75- 

Terms,  mercantile  credit,  69. 

Terms  of  credit,  66. 

The  first  mercantile  agency,  98. 

Tickler  system,  the,  267. 

Trade  and  financial  papers,  184. 

Traveler's  letter  of  credit,  23. 

Traveling  credit  representa- 
tives, 181. 

Trustee,  in  bankruptcy,  343 ;  in 
adjustments,  321. 

Tj^pical  agency  reports,  no, 
127. 

Unearned  discount  abuse,  the, 
283. 


390 


INDEX 


Uniform  sales  act,  290. 
Uses  and  advantages  of  credit, 
6. 


Voluntary      and      involuntary 
bankruptcy,  334. 


Weak  debtors,  howr  to  treat  in 
collections,  270. 

Wholesale  Shoe  League,  form 
of  report,  135 ;  specimen  in- 
formation blank,  133. 

Winding  up  an  estate,  321. 

Working  capital,  232. 


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